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AMERICAN  RAILROAD  ECONOMICS 


THE  MACMILLAN  COMPANY 

NEW  YORK   •  BOSTON   •   CHICAGO   •  DALLAS 
ATLANTA   •   SAN  FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON   •  BOMBAY   •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA.  Ltd. 

TORONTO 


AMERICAN  RAILROAD 
ECONOMICS 

A  TEXT-BOOK  FOR  INVESTORS  AND  STUDENTS 


BY 
A.  M.  SAKOLSKI,  Ph.D. 

STAFF    LECTUEEB    IN    NEW    YOBK  UNIVERSITY    SCHOOL 
OF    COMMERCE,    ACCOUNTS  AND    FINANCE 


Nnti  fork 

THE  MACMILLAN  COMPANY 

1913 

All  right*  rttened 


^^ 


^^ 


COPTBIOBT,   1913 

bt  the  macmillan  company 

Set  up  and  electrotyped.    Published  October,  191S 


C>'<Ui 


•  ••••••••  t  •••  •     •  •.• 


FERRIS    PRINTING    COMPANY 
NEW  yonK.  N.  Y.,  U.  8.  A. 


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PREFACE 

This  book  is  the  product  of  the  author's  activi- 
ties as  an  investment  analyst  in  New  York  and  as 
an  instructor  in  Railroad  Finance  at  the  New  York 
University  School  of  Commerce,  Accounts  and  Finance, 
The  subject,  hitherto,  has  not  been  given  the  atten- 
tion and  the  critical  analysis  commensurate  with  its 
importance.  The  large  amount  of  statistical  data 
and  other  information  contained  in  the  annual  re- 
ports of  the  railroads  are  generally  accepted  without 
much  inquiry.  The  work  that  has  been  done  thus 
far  by  professional  analysts  and  railroad  statisti- 
cians aims  to  gauge  railroad  activities  by  the  use  of 
rigid  standards  and  definite  mathematical  formulae. 
In  these  pages  no  attempt  is  made  to  lay  down  rules 
or  maxims.  No  tables  of  "averages"  are  presented 
as  final  evidence  of  railroad  status  or  progress.  The 
purpose  throughout  is  a  critical  examination  of  facts 
and  figures  derived  from  railroad  reports  and  other 
publications  with  a  view  to  assisting  in  the  correct 
judgment  of  railroad  activities  and  operating  results. 


'x b  i  xiy  i 


INTRODUCTORY 

In  no  other  country  and  at  no  previous  time  have 
railroad  operations  received  as  much  attention  as 
at  present  in  the  United  States,  and  it  is  doubtful 
whether  these  matters  have  ever  been  more  fla- 
grantly misinterpreted.  The  economic  importance 
of  American  railroads  and  the  participation  of  the 
people  as  individual  investors  in  their  rapid  growth 
and  development  creates  a  demand  for  the  proper 
understanding  of  railroad  activities  and  operating 
results.  Government  regulation  under  the  Inter- 
state Commerce  Act  has  promoted  and  assisted  this 
demand.  The  publications  of  the  Federal  and  State 
commissions  are  now  as  important  sources  of 
statistical  information  as  the  reports  issued  by  the 
individual  railroad  companies.  These  published  sta- 
tistical returns  are  in  many  ways  useful  to  the  rail- 
road manager,  to  the  investor  and  to  the  public. 
The  expensiveness  of  compilation  and  the  liabiHty 
to  abuse  and  misinterpretation  render  necessary  the 
utmost  wariness  and  care  in  analyzing  such  data. 

It  is  because  of  the  difficulty  of  arriving  at  satis- 
factory standards  that  railroad  statistics  are  ex- 
tremely troublesome  to  formulate.  There  are  many 
factors  to  be  CQnsidered  outside  of  the  bare  figures 

and  the  relative  values  of  these  factors  are  con- 

vii 


viii  INTRODUCTORY 

stantly  changing.  All  modern  countries  desire  a 
satisfactory  stable  unit  by  which  operating  results 
as  between  different  railroads  and  at  different  periods 
of  time  may  be  unmistakably  presented  to  the  pub- 
lic. Uniformity  of  statistics,  however,  does  not 
admit  of  an  actual  and  final  comparison  of  one  rail- 
way with  another,  or  of  the  operations  of  one  period 
with  another  period,  nor  do  "averages"  covering 
an  endless  variety  of  lines  and  systems  form  a  wholly 
reliable  basis  for  judging  results.  The  Pennsylvania 
and  the  Philadelphia  &  Reading  Railroads,  for  ex- 
ample, are  ordinarily  held  to  be  competing  roads 
of  the  same  standard  of  financial  soundness  and 
operating  eflSciency.  The  Pennsylvania,  however, 
has  a  traflSc  amounting  to  many  times  that  of  the 
Philadelphia  &  Reading.  Moreover,  the  charac- 
teristics of  the  two  lines  are  in  many  respects  differ- 
ent. The  Reading  is  practically  a  terminal  road, 
while  the  Pennsylvania  branches  out  in  all  direc- 
tions and  extends  over  almost  half  of  the  Continent, 
carrying  a  great  volume  of  through  traffic.  It  is 
necessary,  therefore,  in  any  comparisons  between 
these  two  systems,  to  take  into  account  the  relative 
proportions  of  termjnal  work,  the  nature  of  the 
traffic  and  the  length  of  the  haul  and  other  similar 
factors.  Unless  this  is  done,  a  comparison  of  the 
operating  results  based  entirely  on  statistics  would 
be  quite  misleading. 

Another  cause  of  the  defects  in  the  use  of  railroad 
statistics  is  the  misunderstanding  of  the  real  signifi- 
eance  of   each  statistical  item.     Too  little  or  too 


INTRODUCTORY  ix 

much  emphasis  may  be  placed  on  the  material  used. 
The  soundness  of  statistical  logic  in  general  requires 
that  the  intrinsic  worth  of  the  figures  presented  be 
fully  recognized.  Lack  of  appreciation  of  this  fact 
frequently  leads  to  erroneous  analyses  and  improper 
comparisons.  Moreover,  unless  a  statistical  analysis 
is  of  some  distinct  value  to  the  railroad  executive  or 
manager,  to  the  investor,  or  to  the  statesman  and 
the  public  at  large,  work  of  this  character  cannot 
be  economically  justified.  In  other  words,  each 
class  of  railroad  data  should  have  an  underlying 
purpose  and  should  be  compiled,  classified  and  in- 
terpreted to  accord  with  this  purpose. 

Having  in  mind  these  considerations  the  ma- 
terials forming  the  basis  of  this  book  are  classified 
as  follows: 

(1)  Data  relating  to  the  character  of  the  transporta- 
tion facilities.  Hereunder  are  analyzed  the  physical 
features  of  railroads  in  so  far  as  they  influence  rail- 
road operations  and  indicate  the  adjustment  of 
transportation  facilities  to  traflSc  demands. 

(2)  Data  measuring  efficiency  and  economy  of  oper- 
ation. These  are  the  so-called  traflSc  or  "mileage" 
statistics,  indicating  the  nature  and  volume  of  the 
traflSc,  and  the  cost  in  transporting  and  in  handhng 
the  same,  expressed  under  proper  terms  and  in  stan- 
dard units. 

(3)  Data  measuring  revenues,  expenses  and  net 
earnings.  Herein  is  comprised  the  study  of  the 
Income  Account  and  Profit  &  Loss  Account. 

(4)  Data  measuring  the  capital  investment  in  rela- 


X  INTRODUCTORY 

Hon  to  the  corporate  resources  and  liabilities.  Analyses 
of  the  General  Balance  Sheet  and,  more  particularly, 
Capitalization  are  afforded  by  this  class  of  material. 
In  order  that  these  topics  may  be  more  clearly 
understood  preliminary  chapters  are  inserted,  treat- 
ing of  railroad  rates  and  railroad  securities  and 
describing  the  important  railroad  systems  of  the 
United  States. 


TABLE  OF  CONTENTS 

PAGE 

Pbbpace vii 

Inteoductobt ix 

Chapter  I.  Railroad  Rates 1-16 

Economic  Theory  of  Rates — Railroad  Rate  Regulation — Inter- 
state and  Intrastate  Rates — Sectional  Competition  and  Rate 
Adjustments — "Long  and  Short  Haul"  Rates — Rates  and 
Changes  in  Economic  Conditions. 

Chapter  II.  Railroad  Securities 17-44 

Capital  Stock — Preferred  Stocks — Common  Stock — Railroad 
Funded  Indebtedness — Railroad  Mortgage  Bonds — Collateral 
Trust  Bonds — Convertible  Bonds — ^Income  Bonds — Railroad 
Short  Term  Securities. 

Chapter  III.  Railroad  Systems  op  the  United  States 44-84 

Development  of  Railroad  Systems — Geographical  Location  of 
Railroad  Systems — New  England  Systems — Eastern  Trunk 
Line  Systems — Anthracite  Systems — Southern  Systems — Mis- 
sissippi Valley  Systems — Middle  Western  Systems  in  the  North 
— The  Northwestern  Trunk  Line  Systems — The  Southwestern 
Systems — Traffic  Interchange  Agreements. 

Chapter  IV.  Economics  op  Railroad  Construction 85-101 

Investment  Basis  of  Railroad  Construction — The  Nature  of  the 
Prospectus — The  Estimated  Volume  of  Traffic — The  Rates  to 
be  Charged — Selection  of  the  Route — The  Estimate  of  Con- 
struction Cost — The  Fundamental  Economic  Principle  of  Eco- 
nomic Railroad  Construction. 

Chapter  V.  Physical  Factobs  in  Economic  Operation:  Way 

AND  Structures 102-123 

Railway  Location — Distance — Grades — Curves — Roadbed  and 
Superstructure  —  Track  Facilities  —  Rails —  Ballast  —  Ties — 
Bridges  and  Trestles — Tunnels — Railroad  Terminals. 

Chapter  VI.  Physical  Factors  in  Economic  Operation:  Raii/- 

ROAD  Rolling  Equipment 124-134 

Locomotives — Cars. 

zi 


rii  CONTENTS 

PAGE 

Chapter  VII.  Traffic  Statistics 135-168 

Passenger  and  Freight  TralBSc — Classification  of  TraflSc  Sta- 
tistics— The  Ton-Mile  Averages — Classification  of  Commodity 
TraflBc — Diversification  of  Traffic — Traffic  Density — Average 
Length  of  Haul — Statistics  for  Measuring  Operating  Economy 
and  Efficiency — Train-mile — The  Locomotive-mile — ^The  Aver- 
age Car-mile — Average  Train-load — Average  Car-load — Train- 
frequency  and  Speed — Conclusion. 

Chapter  VIII.  Interstate  Commerce  Commission's  System  of 

Railroad  Accounts 169-186 

Classification  of  Railroad  Financial  Data — The  Underlying  Mo- 
tives of  the  Interstate  Commerce  Commission's  Accounting 
System — Principal  Accounting  Regulations — Joint  Facilities 
Accounts — Enforced  Maintenance  of  Depreciation  Accounts — 
Classification  of  Additions  and  Betterments — Commissions 
and  Discounts  Paid  or  Premiums  Received  from  Sale  of 
Securities — Losses  on  Account  of  Abandonment  of  Property. 

Chapter  IX.  The  Income  Account — Operating  Accounts.  .186-220 
The  Form  of  the  Income  Account — Details  of  Operating  Ac- 
counts— Standard  Units  of  Operating  Receipts — Operating  Ex- 
penses— Classification  of  Operating  Expenses — The  Measure- 
ment of  Maintenance — Equipment  Maintenance — Conducting 
Transportation  Costs — Locomotive  Fuel  Expense — Wages — 
The  Operating  Ratio — Net  Operating  Revenue — Taxes. 

Chapter  X.  Net  Income  and  its  Distribution 221-240 

Operating  Income — Deductions  from  Corporate  Income — Net 
Corporate  Income  and  the  Margin  of  Safety — Distribution  of 
Net  Corporate  Income — The  Profit  and  Loss  Account. 

Chapter  XL  The  General  Balance  Sheet 241-264 

General  Survey  of  the  Balance  Sheet — Property  Accounts — 
Working  Assets  and  Liabilities — Surplus. 

Chapter  XII.  Railroad  Capitalization 265-285 

Nature  of  Railroad  Capitalization — Gross  Capitalization — Cap- 
italization and  Leased  Mileage — Errors  in  Capitalization  Sta- 
tistics— Relative  Interest  Burden — Style  of  Capitalization — 
Trend  of  Railroad  Capitalization. 

Index 287 


AMERICAN  RAILROAD  ECONOMICS 


AMERICAN   RAILROAD 
ECONOMICS 


CHAPTER  I 

RAILROAD  RATES 

Economic  Theory  of  Rates.  The  economic  basis 
of  railroad  rate  making  is  that  the  charge  for  the 
service  shall  permit  a  profit  both  to  the  shipper  (or 
passenger)  and  to  the  carrierp  If  the  rate  is  such  as 
not  to  afford  the  shipper  a  profit  through  the  trans- 
portation of  his  goods,  he  will  dispose  of  them  at 
home  and  the  railroad  will  lose  the  business.  On 
the  other  hand,  if  the  rate  is  so  low  that  the  carrier 
directly  or  indirectly  obtains  no  profit,  the  service 
is  no  longer  a  field  for  business  enterprise.  This 
principle  applies  to  individual  rates  as  well  as  to  the 
general  level  of  charges.  It  is  somewhat  obscured  by 
the  heterogeneous  character  of  railroad  traffic  and 
the  wide  disparities  and  the  complexities  in  existing 
rate  structures.  There  are  undoubtedly  many 
instances  when  goods  and  persons  are  accepted  for 
transportation  at  rates  which  yield  revenue  less  than 
the  direct  cost  of  performing  the  service.  Usually, 
however,  such  rates  are  fixed  with  a  view  to  assisting 
or  promoting  other  and  more  remunerative  traffic. 
The  service  in  this  case  is  preliminary  or  auxiliary 

1 


[ 


,  I  ,^^;  ...AMERICAN  RAILROAD  ECONOMICS 

to  a  further  service.  Thus,  raw  materials  are  fre- 
quently hauled  at  a  loss  because  in  this  way  the  rail- 
road company  is  enabled  to  obtain  the  traffic  arising 
from  the  movement  of  the  finished  product.  Sim- 
ilarly, very  low  commutation  rates  are  granted  to 
passengers  travelling  between  cities  and  suburban 
districts  so  as  to  promote  the  growth  of  these  locali- 
ties and  thus  furnish  a  local  movement  of  merchan- 
dise to  supply  the  needs  of  increasing  suburban 
population.  Under  these  conditions,  rates  are  ad- 
justed so  as  to  give  the  railroad  a  maximum  net 
return  on  its  operations. 

The  margin  of  the  charge  within  which  a  railroad 
company  can  profitably  conduct  business  and  the 
public  can  furnish  business  varies  with  each  class  of 
traffic  and  with  each  journey  or  shipment.  It  is 
exceedingly  difficuH:  to  determine  even  approxi- 
mately without  actual  tests.  Fluctuations  in  the 
price  of  commodities  and  in  wages,  changes  in  eco- 
nomic and  industrial  conditions  and  in  the  supply  of 
available  traffic  are  continually  altering  the  price 
margin  beyond  which  the  seller  or  the  purchaser  of 
the  service,  or  both,  may  suffer  an  economic  disad- 
vantage. The  nature  of  some  commodities,  in  re- 
spect to  value,  bulky  and  relative  ease  or  difficulty  in 
handling,  may  permit  a  wide  range  between  the 
lowest  and  the  highest  rate  at  which  they  may  be- 
come a  part  of  railroad  traffic.  There  are  a  number 
of  commodities,  on  the  other  hand,  for  which  the 
range  is  exceedingly  narrow.  A  slight  change  in  the 
rate  may  cause  an  economic  burden  on  the  shipper. 


RAILROAD  RATES  S 

or  on  the  railroad.  Let  us  assume  that  manure  ob- 
tained in  a  city  somewhat  distant  from  farm  lands 
is  offered  for  transportation.  The  value  of  this 
article  in  proportion  to  bulk  is  very  small.  Unless 
the  transportation  rate  is  low,  it  will  not  pay  to  have 
it  shipped  to  the  farms  where  it  has  a  value.  The 
railroad  company,  on  the  other  hand,  cannot  make 
a  direct  profit  from  the  transportation,  unless  the 
rate  is  high  enough  to  cover  the  expense  in  furnishing 
the  service.  It  can  be  readily  seen  in  this  case  that 
the  adjustment  of  the  rate  must  come  within  a  very 
narrow  margin,  otherwise  the  commodity  will  not 
become  an  article  of  railroad  traffic.  But  the  ship- 
ment of  manufactured  silk  from  one  locality  to 
another,  or  even  from  one  continent  to  another, 
would  be  very  little  affected  by  a  slight  increase  or 
decrease  in  the  freight  rate.  In  almost  any  region, 
the  transportation  cost  of  silk  would  be  but  a  very 
small  fraction  of  its  market  price.  On  commodities 
of  this  nature  the  range  of  adjustment  of  freight 
charges  permits  a  wide  choice  of  rates. 

The  necessity  of  distinguishing  in  rate  making 
between  the  kinds  of  commodities  and  the  sources 
of  traffic  has  engendered  the  principle  known  as 
"charging  what  the  traffic  will  bear."  This  expres- 
sion, as  pointed  out  by  Mr.  Acworth,^  has  acquired 
an  ill  repute.  It  is  commonly  defined  as  veiled  ex- 
tortion. Yet,  it  represents  the  only  economic 
principle  of  developing  commerce  and  industry  with 
modern  transportation  facilities. 

*  Elements  of  Railroad  Economics,  p.  75. 


4  AMERICAN  RAILROAD  ECONOMICS 

Of  recent  years,  in  the  discussion  of  rate  questions 
there  have  been  endeavors  to  distinguish  between 
charges  based  on  the  value  of  the  service  and  charges 
based  on  the  cost  of  the  service.  By  "value  of  the 
service"  is  meant  what  the  pubhc  can  afford  to  pay 
for  the  service,  whereas  the  "cost  of  the  service"  is 
all  the  expenses  of  the  carrier  in  performing  the 
service.  Taken  alone,  as  an  explanation  of  rates, 
these  two  theories  "do  little  more  than  to  base  rates 
for  the  most  part  on  themselves  and  on  each  other." 
As  pointed  out  by  Prof.  John  M.  Clark,  "The  value 
of  a  transportation  service  is  sometimes  defined  as 
the  difference  between  the  price  of  the  commodity 
in  question  at  the  point  of  shipment  and  the  price  at 
the  destination.  .  .  .  The  suggestion  is  altogether 
deceptive,  for  the  difference  in  price  itself  depends 
on  the  transportation  charges."  ^ 

The  cost  of  service  theory  is  likewise  unsatisfactory 
for  by  no  manner  of  means  can  railroad  costs  be 
measured  or  applied  directly  to  particular  railroad 
services.  The  transportation  cost  of  each  class  or 
kind  of  commodity  not  only  differs,  but  each  item  of 
traflSc  at  any  given  time  and  at  each  haul  has  a 
different  cost.  Cost  is  the  resultant  of  all  conditions 
under  which  the  transportation  business  is  done.  As 
is  pointed  out  on  page  145,  one  of  the  chief  elements 
affecting  cost  in  railroad  operations  is  traffic  density 
(i.  e^yolume  of  traffic).  The  more  business  done,  the 
lower  the  cost  of  performing  each  unit  or  item  of 

^  "Standards  of  Reasonableness  in  Local  Freight  Discriminations,"  by 
John  Maurice  Clark,  Ph.D.,  pp.  52-53. 


RAILROAD  RATES  5 

business.  The  rates  themselves,  however,  influence 
the  volume  of  business.  Accordingly,  to  base  rates 
entirely  on  cost  would  be  attempting  to  find  one 
unknown  quantity  by  using  another. 

Railroad  Rate  Regulation.  Notwithstanding  the 
impracticability  of  establishing  definite  and  concrete 
standards  of  rate  making  or  in  determining  criteria 
for  rate  reasonableness,  transportation  charges  have 
become  matters  of  government  regulation  and  super- 
vision. A  railroad,  even  though  privately  owned 
and  operated,  is  an  instrument  of  public  service.  Its 
rates  and  charges  affect  closely  the  public  welfare. 
The  self-interest  of  the  railroad  company  in  the  fixing 
of  rates  is  not  to  be  permitted  to  have  full  play.  In 
other  words,  private  gain,  though  a  motive  for  , 
railroad  operation,  is  controlled  by  a  higher  motive, 
namely,  public  welfare.  This  does  not  mean  that 
private  gain  and  public  welfare  are  opposing  forces. 
In  fact,  no  system  of  transportation  charges  will  long 
prevail,  where  either  force  is  neglected. 

The  fundamental  importance  of  reasonable  freight , 
rates  as  affecting  the  general  welfare  in  the  United 
States  can  hardly  be  exaggerated.  Probably  in  no 
other  civilized  country  do  railroads  play  as  important 
a  part  in  economic  and  industrial  development  as 
they  do  in  the  United  States.  The  long  distances 
separating  leading  industrial  centers,  the  varying 
character  of  geographical  divisions,  the  diversity  of 
natural  resources  and  the  broad  expanses  of  un- 
developed and  partially  developed  territory,  all  com- 
bine to  make  the  great  transportation  agencies  fore- 


6  AMERICAN  RAILROAD  ECONOMICS 

most  factors  in  industrial  affairs.  Railroad  progress, 
both  physical  and  financial,  is  therefore,  a  matter 
of  grave  public  concern. 

The  close  dependence  of  public  welfare  on  the 
railroads  in  the  United  States  led  to  the  creation 
of  a  governmental  regulating  body,  the  Interstate 
Commerce  Commission.  Since  the  passage  of  the 
Act  of  1887  creating  this  commission,  Federal  con- 
trol over  railroads  has  been  broadened  and  intensi- 
fied. Each  amendatory  act  or  supplementary  stat- 
ute has  augmented  the  powers  and  duties  of  the 
Interstate  Commerce  Commission,  until  no  other 
tribunal  of  the  Government  has,  at  present,  such 
extensive  functions  or  is  burdened  with  such  onerous 
duties.  Primarily  established  to  detect  rate  dis- 
criminations and  abuses,  the  Interstate  Commerce 
Commission  has  developed  an  organization  for  de- 
termining and  controlling  both  the  rate  making  and 
the  operating  activities  of  the  railroads. 

The  original  Interstate  Commerce  Act  of  Feb- 
ruary 4,  1887,  furnished  no  definite  theory  for  de- 
termining reasonable  rates  or  rate  discriminations; 
none  could  be  adopted  without  the  sanction  and 
approval  of  the  courts.  The  lack  of  definiteness  in 
the  wording  of  the  organic  law,  resulted  in  a  series 
of  conflicting  legal  opinions  which  greatly  hindered 
the  Commission  in  its  activities.  At  the  beginning 
the  Commission  refrained  from  claiming  the  right 
to  prescribe  "reasonable"  rates,  though  the  fact 
soon  became  apparent,  that  as  an  effective  rate 
regulative   tribunal   it   must    "make"    as   well   as 


RAILROAD  RATES  7 

"break"  rates.  The  Commission  endeavored  as 
far  as  possible  to  enlarge  its  usefulness  by  assuming 
the  power  of  prescribing  specific  rates  in  lieu  of  those 
condemned  as  unreasonable.  The  legality  of  this 
process,  however,  was  disputed,  and  when  sub- 
mitted to  the  courts,  failed  to  receive  judicial  ap- 
proval.^ 

Legal  decisions  and  legislative  enactments  during 
the  first  twenty  years  hampered  the  activities  of 
the  Interstate  Commerce  Commission.  Inasmuch 
as  appeals  from  the  decisions  of  the  Commission 
necessitated  an  entire  review  of  evidence,  nothing 
was  gained  from  its  labors,  either  in  the  expedition 
or  final  adjudication  of  rate  controversies.  During 
this  period  the  Interstate  Commerce  Commission, 
moreover,  was  not  concerned  with  the  reasonable- 
ness of  the  general  scale  of  freight  charges,  chiefly 
because  of  the  absence  of  serious  complaints  on  this 
score.  Modifications  in  freight  classifications  in 
1900,  combined  with  the  public  dissatisfaction  over 
the  ineflScacy  of  the  Interstate  Commerce  Act,  made 
the  question  of  freight  rates  prominent.  About 
this  time,  also,  traflSc  congestion  on  the  railroads 
produced  unsatisfactory  transportation  service,  the 
outcome  of  which  was  a  clamor  for  additional  legis- 
lation, culminating  in  the  Hepburn  Act  of  June,  1906. 

The  Hepburn  Act  as  finally  passed,  though  it 
granted  the  Commission  power  to  prescribe  a  rail- 

^  New  Orleans  and  Texas  Pacific  Railway  vs.  Interstate  Commerce 
Commission,  162  U.  S.  184;  also  "Maximum  Freight  Rate"  Decision, 
167  U.  S.  479. 


8  AMERICAN  RAILROAD  ECONOMICS 

road  rate  in  lieu  of  one  declared  unreasonable,  was 
merely  a  stepping-stone  to  complete  rate  control. ) 
Further  legislation  regulating  freight  rates  was  en- 
acted by  Congress  in  1910,  when  the  Commission 
was  given  full  power  to  suspend  all  changes  in  freight 
rates  for  a  maximum  period  of  six  months  pending 
an  investigation  of  the  reasonableness  of  the  changed 
rates.  Thus,  the  Interstate  Commerce  Commission 
has  full  rate  fixing  powers.  Through  its  decisions 
it  can  seriously  affect  both  the  earning  power  of 
the  railroads  and  the  welfare  of  the  public. 

The  ultimate  outcome  of  the  rate  determining 
power  of  the  Interstate  Commerce  Commission  is 
indeed  problematical.  The  elements  of  permanency 
and  rigidity  in  rates,  which  are  incompatible  with 
changing  economic  conditions,  is  not  obviated  even 
in  the  absence  of  Government  rate  control.  Rate 
making  of  itself  is  such  a  delicate  and  complicated 
task  that  when  a  scale  of  charges  is  once  established, 
railroad  managers,  in  spite  of  competitive  forces, 
are  loath  to  make  adjustments  warranted  by  eco- 
nomic conditions.  It  is  from  the  stereotyped  rates 
of  the  last  generation  that  the  railroads  find  it  very 
difficult  to  free  themselves  by  establishing  new  rate 
schedules. 

Interstate  and  Intrastate  Rates.  One  of  the 
principal  obstacles  to  efficient  Federal  rate  regula- 
tion is  the  power  held  by  each  State  to  control 
rates  on  traffic  within  its  borders.  These  intrastate 
rates  have  become  exceedingly  burdensome  to  the 
railroads.     In  order  to  escape  them,  the  claim  was 


RAILROAD  RATES  9 

made  in  a  number  of  cases  that  these  rates  were 
an  interference  of  interstate  commerce  and,  there- 
fore, unconstitutional.  The  result  of  this  litigation 
was  made  known  in  the  Minnesota  Rate  Cases  de- 
cided by  the  Supreme  Court  on  June  9,  1913.  The 
Court  held: 

(1)  That  the  Constitution  gives  Congress  an  au- 
thority at  all  times  adequate  to  secure  the  freedom 
of  interstate  commercial  intercourse  from  State  con- 
trol and  to  provide  effective  regulation  of  that  inter- 
course as  the  national  interest  may  demand. 

(2)  That  control  of  commerce  confined  within 
one  State  and  not  affecting  other  States  is  reserved 
to  that  State. 

(3)  That  even  without  action  by  Congress  the  ^ 
commerce  clause  of  the  Constitution  necessarily  ex- 
cludes States  from  direct  control  of  subjects  which 
should  be  prescribed  by  a  single  authority. 

(4)  That  there  remains  to  the  States  the  exercise 
of  the  power  appropriate  to  their  territorial  juris- 
diction in  making  suitable  provision  for  local  needs. 

The  effect  of  the  decision  is  to  sustain  the  power 
of  the  State  railroad  commissions  and  State  legis- 
latures to  fix  two-cent  passenger  or  other  rates  on 
business  exclusively  within  the  States,  'provided  al- 
ways that  the  rates  are  not  confiscatory.  The  Supreme 
Court  holds  further,  however,  that  Congress  has 
the  power  to  override  State  authorities  as  regards 
the  fixing  of  rates  which  will  affect  interstate  busi- 
ness whenever  it  shall  seek  to  exercise  such  authority. 
It  is  not  through  a  lack  of  power,  but  because  Con- 


10        AMERICAN  RAILROAD  ECONOMICS 

gress  has  failed  to  exercise  that  power,  that  the  Su- 
preme Court  decided  against  the  railroads. 

A  problem  arising  from  the  intrastate  rate  regula- 
tion is  whether  a  State  authority  can  fix  a  rate  which 
in  effect  constitutes  a  discrimination  against  locali- 
ties in  other  States.  This  is  the  interesting  conten- 
tion in  the  Shreveport  Case  ^  in  which  the  Interstate 
Commerce  Commission  set  aside  rates  fixed  by  the 
laws  of  Texas.  The  fight  against  the  Texas  rates 
was  begun  by  the  Louisiana  Railroad  Commission 
before  the  Interstate  Commerce  Commission.  The 
Louisiana  authorities  set  forth  that  the  low  rates 
forced  upon  the  railroads  on  intrastate  traffic  within 
the  State  of  Texas  gave  a  very  pronounced  advantage 
to  shippers  from  Houston  and  Dallas,  to  other  points 
in  Texas,  as  against  shippers  from  Shreveport,  La., 
to  Texas  points  about  equally  distant  between  the 
Texas  and  the  Louisiana  shipping  centers.  In  mak- 
ing its  order  the  Interstate  Commerce  Commis- 
sion expressly  declared  that  rates  fixed  by  State  law 
within  the  limits  of  Texas  constituted  a  discrimina- 
tion against  points  outside  the  State,  and  several 
railroads  were  directed  to  disregard  the  low  rates 
imposed  on  traffic  within  the  Texas  limits.  The 
Commerce  Court  has  sustained  the  order  of  the 
Interstate  Commerce  Commission. 

Sectional   Competition   and  Rate  Adjustments. 

Along  with  the  Government's  responsibility,  in  freight 

rate  adjustments,  for  national  progress  and  railroad 

weKare,  the  problem  of  sectional  competition  and 

1  gee  23 1.  C.  C,  p.  31, 


RAILROAD  RATES  11 

traffic  distribution  must  be  considered.  Probably 
the  most  influential  factor  in  causing  rate  discrimina- 
tions is  the  profound  dissatisfaction  of  many  com- 
munities with  their  status  in  competing  for  the 
distribution  of  their  products  with  other  communi- 
ties better  situated  geographically.  These  com- 
munities are  far  less  concerned  about  obtaining  low  / 
rates  than  about  securing  such  rates  as  may  place 
them  in  a  favorable  competitive  position  with  other 
sections.  The  Interstate  Commerce  Commission, 
in  dealing  with  proposed  rate  changes,  finds  itself 
much  more  hampered  by  the  conflicting  claims  of 
competing  localities  than  by  the  troubles  of  deter- 
mining whether  given  rates  are  in  themselves  reason- 
able. The  Commission  can  completely  alter  or 
destroy  traffic  relationships  by  merely  reducing 
some  rates  and  not  reducing  others.  That  it  has 
this  right  has  been  tentatively  upheld  by  the  Su- 
preme Court  in  the  Missouri  River  Rate  Cases.  ^ 
The  question  in  these  cases  was  the  validity  of  the 
Commission's  order  reducing  certain  rates  charged 
on  through  freight  from  the  Atlantic  seaboard  to 
Missouri  River  cities.  These  rates  had  been  made 
up  by  adding  to  the  rate  from  the  Atlantic  seaboard 
to  the  Mississippi  River  the  full  local  rate  from  the 
Mississippi  River  crossings  to  the  cities  on  the  Mis- 
souri River.  Thus  a  general  class  rate  per  hundred 
pounds  from  the  seaboard  to  the  Mississippi  River 
was  87  cents,  and  the  rate  thence  to  the  Missouri 

^  Interstate  Commerce  Commission  vs.  the  Chicago,  Rock  Island  8i 
Pacific  R.  R.,  et  al.,  U.  S.  218  p.  88, 


12        AMERICAN  RAILROAD  ECONOMICS 

River  points  was  60  cents,  making  $1.47  the  joint 
rate.  The  Commission  ordered  a  reduction  to  $1.38, 
a  difference  of  9  cents.  The  Circuit  Court  in  re- 
straining this  order  of  the  Commission,  held  that  the 
reduction  gave  undue  advantages  to  the  Atlantic 
seaboard  manufacturers  and  jobbers  against  the  com- 
petition of  manufacturers  and  jobbers  in  both  the 
Missouri  River  and  intervening  territory;  and  that 
this  rearrangement  of  competitive  traffic  conditions 
was  not  within  the  powers  granted  to  the  Interstate 
Commerce  Commission.  The  Supreme  Court  (by 
a  decision  of  four  judges  against  three)  reversed  this 
judgment. 

"Long  and  Short  Haul"  Rates.  The  problem  of 
traffic  distribution  on  an  equitable  basis  involves 
consideration  of  "long  and  short  haul"  charges  and 
water  competition.  The  Interstate  Commerce  Act 
provides  that  the  railroads  shall  not  charge  more 
for  a  short  haul  than  a  longer  one  over  the  same  line 
in  the  same  direction  except  with  the  express  authori- 
zation of  the  Interstate  Commerce  Commission  upon 
application  by  the  carrier  and  after  investigation. 
The  principal  justification  for  higher  shorter  haul 
rates  than  are  granted  for  longer  hauls  on  the  same 
line  is  competition  both  of  paralleling  rail  lines  and 
of  water  transportation.  Through  rail  rates  from 
the  Atlantic  to  the  Pacific  seaboard,  for  example, 
(whenever  it  was  deemed  profitable  for  the  railroads 
to  hold  the  traffic),  were  made  low  enough  to  meet 
the  water  rates  between  these  points.  The  rates 
to  important  inland  points,   even   at  considerable 


RAILROAD  RATES  13 

distance  from  the  coast  terminals,  were  frequently 
a  good  deal  higher.  As  a  general  rule  in  transcon- 
tinental traffic,  the  rates  to  "inter-mountain"  points, 
such  as  Spokane,  Salt  Lake,  Denver  and  Reno,  were 
made  to  approximate  the  charge  to  the  Pacific  coast 
points,  plus  an  additional  "back-haul"  rate.  This 
made  the  coast  terminal  cities'  the  distributmg  points 
inland  and  prevented  the  growth  of  interior  traffic 
centers  as  rivals  to  those  on  the  coast.  Thus,  the 
system  of  "long  and  short  haul"  rates  arising  from 
water  competition  determined  to  a  large  extent  the 
location  of  industries  and  the  geographical  develop- 
ment of  trade. 

A  recent  decision  of  the  Commission  which  at- 
tracts the  most  attention  with  reference  to  water 
competition  is  the  verdict  in  the  Spokane  Rate  case.^ 
In  this  controversy  the  most  important  contention 
of  the  railroads  was  the  existence  of  water  compe- 
tition centering  about  Spokane.  Traffic  from  the 
Atlantic  seaboard  to  any  destination  like  Spokane 
could  be  moved  by  water  to  the  coast  and  thence 
by  rail  to  the  interior  point.  A  competitive  rail  rate 
to  the  interior  point,  therefore,  would  be  the  sum  of 
the  water  rate  plus  the  rail  rate  from  the  coast.  As 
a  result  of  a  previous  decision,  however,  the  rate  to 
Spokane  from  the  East  had  been  reduced  to  75  per 
cent,  of  the  rate  to  the  coast  cities,  plus  16  /s  per 
cent,  of  the  local  back-haul  rate.  The  coast  cities 
complained  that  this  adjustment  gave  a  competitive 

^  City  of  Spokane,  et  al.  vs.  Northern  Pacific,  et  at.  Interstate  Com- 
merce Commission,  Opinion  No.  1383. 


14        AMERICAN  RAILROAD  ECONOMICS 

advantage  to  Spokane  as  a  distributing  center. 
The  Commission,  however,  did  not  accept  the  con- 
tention of  the  coast  cities,  but  expressed  a  doubt 
whether  the  railroads  should  be  permitted  to  con- 
struct a  tariff  for  the  express  purpose  of  compelling 
the  manufacture  or  the  merchandizing  of  a  given 
commodity  at  Chicago,  or  upon  the  Missouri  River, 
or  at  any  other  place.  The  Commission,  moreover, 
denied  that  the  railroads  were  at  liberty  to  meet 
water  competition  "in  whatever  way  or  to  whatever 
extent  they  see  fit."  In  other  words,  the  railroads 
are  not  allowed  to  consult  merely  their  own  interests 
or  the  desire  of  the  communities  which  they  serve. 

A  further  problem  involved  in  the  equalization  of 
traffic  distribution  by  means  of  freight  rates  is  the 
competition  of  home-  with  foreign-made  products. 
The  position  taken  by  the  Commission  with  respect 
to  the  relation  between  railroad  rates  and  foreign 
competition  in  similar  goods  is  indicated  in  the 
California  citrus  fruit  cases,  ^  in  connection  with  the 
rates  charged  on  lemons.  The  world's  supply  of 
lemons  is  chiefly  produced  in  two  localities — Sicily 
and  Southern  California.  The  cost  of  producing 
lemons  in  Sicily  is  much  less  than  in  California,  as 
labor  enters  largely  into  the  cost  of  production.  In 
spite  of  a  protective  duty  of  $1  per  hundred  pounds 
(increased  by  the  Payne  Tariff  Act  to  $1.50  per 
hundred  pounds)  the  low  water  transportation  charges 
available  to  the  Sicily  lemon  prohibited  the  sale  of 
the  California  product  in  territory  east  of  the  Missis- 

1 19  Interstate  Commerce  Commission  Report,  p.  148. 


RAILROAD  RATES  15 

sippi  River.  The  Commission  decided  that  an  in- 
crease in  the  rate  from  $1.00  to  $1.15  per  hundred 
pounds  on  Cahfornia  lemons  to  the  Eastern  sea- 
board, established  since  the  passage  of  the  Payne 
Tariff  Act,  was  exorbitant,  and  that  the  old  rate  of 
$1.00  per  hundred  pounds  should  be  restored,  in 
order  to  permit  the  sale  of  "home  grown"  lemons 
in  Eastern  territory.  If  the  principle  inferred  from 
this  decision  is  applied  generally,  its  economic  im- 
portance cannot  be  ignored,  since  it  may  be  made 
to  apply  in  every  instance  where  the  tariff  is  in- 
adequate to  protect  against  foreign  competition. 

Rates  and  Changes  in  Economic  Conditions.  Aside 
from  the  problems  of  rate  adjustment  required  by 
the  immediate  exigencies  of  trade  and  traffic  distri- 
bution, modifications  in  systems  of  rates  are  con- 
stantly necessary  in  a  rapidly  growing  country  to 
keep  pace  with  changing  economic  conditions.^ 
This  point  is  well  brought  out  in  the  complaint  of 
the  Lincoln  (Nebraska)  Commercial  Club,  decided 
April  6,  1908.2  Concerning  this  case,  Professor  Rip- 
ley writes: 

Lincoln,  Nebraska,  lies  about  55  miles  southwest  of  Omaha.  Originally 
all  its  supplies  came  from  the  East,  as  both  cities  were  for  a  time  outposts 
of  civilization.  The  coal  supplies  came  from  Iowa  and  Illinois  and  the 
salt  from  Michigan.  On  these  and  most  other  commodities  the  rates  to 
Lincoln  were  made  up  of  a  through  rate  from  the  East  to  the  Missouri 
River,  plus  the  local  rate  on  to  destination.  The  city  of  Lincoln  thus  paid 
considerably  more  than  Omaha  for  all  of  its  supplies.    Gradually  condi- 

^  For  an  excellent  discussion  of  this  question  see  Professor  Ripley's 
"Rate  Making  in  Practice,"  Railroad  Age  Gazette,  June  4,  1909. 
*  Interstate  Commerce  Commission,  Opinion  No.  1102. 


16        AMERICAN  RAILROAD  ECONOMICS 

tions  have  changed,  until  in  1907  it  appeared  that  over  half  the  soft  coal 
consumed  in  Lincoln  was  brought  from  Kansas  and  Missouri;  four-fifths 
of  the  lumber  from  the  South  and  nearly  all  the  rest  from  the  Pacific 
coast;  gas  and  salt  from  the  gas  belt  and  salt  beds  of  Kansas  and  a  great 
deal  of  beet  sugar  from  the  western  fields.  For  a  large  proportion  of  these 
and  other  supplies,  Lincoln  was  actually  as  near  or  nearer  the  point  of 
production  than  Omaha,  and  yet  the  difficulties  of  effecting  an  adjust- 
ment between  rival  carriers  had  prevented  any  modification  of  rates 
corresponding  to  these  changes  in  economic  conditions.^ 

Adaptation  to  business  changes  is  an  essential 
element  of  successful  railway  operation  and  develop- 
ment. American  railroad  managers,  urged  by  com- 
petitive railroad  building,  must  be  active  and  alert 
in  seeking  new  territory  and  new  traffic.  A  strong 
contrast  between  Europe  and  the  United  States 
lies  in  the  fact  that  the  European  railroads  generally 
take  business  as  they  find  it;  whereas,  the  American 
railroads  are  forced  to  make  business. 

^  "  Railroad  Rate  Making  in  Practice,"  Railroad  Age  Gazette,  June  4, 
1909,  p.  1167. 


CHAPTER  II 

RAILROAD    SECURITIES 

Railroad  securities  are  of  two  general  kinds: 
(1)  Capital  Stock,  representing  certificates  of  proprie- 
torship and  (2)  Funded  Obligations^  representing  cer- 
tificates of  indebtedness.  The  owner  of  shares  of 
stock  is  theoretically  a  partner  in  the  enterprise, 
whereas  the  holder  of  certificates  of  indebtedness 
(whether  bonds,  notes  or  warrants)  is  a  creditor. 
The  entire  capital  stock  and  funded  indebtedness 
of  a  railroad  company  constitutes  its  capitalization. 

Capital  Stock.  Capital  stock  is  the  primary  form 
of  capitalization.  Legally,  it  represents  the  fund 
subscribed  by  owners  of  a  corporation  for  the  pur- 
pose of  enabling  it  to  conduct  business  and  to  obtain 
credit  as  a  corporate  entity.  The  form  of  the  cer- 
tificates are  in  shares  usually  of  $100  each.  Some 
of  the  leading  railroad  companies,  notably  the  Penn- 
sylvania, the  Lehigh  Valley  and  the  Reading  have 
$50  shares.  This  unit  of  value  of  the  shares  is  known 
as  the  par  value  or  face  value. 

Shares  of  capital  stock  usually  represent  perma- 
nent and  negotiable  interest  in  the  corporation  issu- 
ing them.  If  this  interest  is  terminable,  it  is  only 
so  at  the  option  of  the  corporation.  Though  the 
corporation  is  theoretically  liable  to  shareholders  and 

17 


18         AMERICAN  RAILROAD  ECONOMICS 

creditors  for  the  money  value  represented  by  the 
stock  certificates,  this  liability  cannot  be  enforced 
by  the  shareholders  on  any  maturity  date  or  as  long 
as  the  corporation  is  an  active,  "going  concern." 
Shares  of  stock,  however,  are  sometimes  issued  under 
contracts  whereby  the  issuing  corporation  reserves 
to  itself  the  right  to  retire  them  at  its  option.  This 
right  may  be  absolute  or  subject  to  conditions  ex- 
pressed in  the  contracts  whereunder  the  shares  were 
issued.  Moreover,  the  whole  or  a  part  of  the  body 
of  stockholders  may  agree  to  an  alteration  of  the 
terms  under  which  the  stock  has  been  issued.  All 
these  matters  are  subject  to  legal  restrictions  and 
to  the  charter  provisions  which  are  binding  upon  the 
corporation. 

The  fact  that  the  stockholder  is  theoretically  a 
"proprietor"  and  not  a  "creditor"  settles  upon 
him  certain  of  the  rights  and  duties  of  proprietor- 
ship. These,  however,  are  only  "equitable"  rights 
and  duties.  They  can  be  exercised  only  in  respect 
to  the  same  rights  and  duties  of  the  other  share- 
holders. The  stockholder,  therefore,  cannot  exercise 
the  common  rights  of  individual  proprietorship  as 
against  the  property  or  the  business  of  the  corpora- 
tion. He  cannot,  in  an  individual  or  private  capacity, 
sequester  all  or  any  part  of  the  property  or  assets. 
He,  personally,  is  not  permitted  to  examine  the 
books  of  account  or  to  interfere  with  the  corpora- 
tion's affairs  unless  as  an  authorized  agent  or  officer 
of  the  corporation  acting  in  accordance  with  its  by- 
laws.    On  the  other  hand,  the  stockholder,  in  a 


RAILROAD  SECURITIES  19 

private  capacity  is  not  personally  liable  for  claims 
against  the  corporation  and  is  not  responsible  for 
its  acts.  This  arises  from  the  legal  principle  of 
"limited  liability,"  on  which  corporate  business 
enterprise  is  based.  The  full  import  of  this  ancient 
principle,  however,  may  be  altered  by  State  and 
Federal  legislation.  Railroad  companies,  like  all 
other  business  corporations,  are  creatures  of  legis- 
lative enactment.  They  draw  their  powers  from  a 
charter  with  which  they  are  legally  bound  to  comply 
in  their  relations  to  the  public,  to  their  creditors  and 
to  their  stockholders. 

One  of  the  principal  rights  usually  pertaining  to 
stock  ownership  in  a  corporation  is  the  privilege  of 
a  pro  rata  vote  in  determining  certain  questions 
relative  to  its  affairs.  The  stockholders  generally 
have  the  right  of  participating  in  the  election  of  the 
officers  or  directors.  They  also  share  in  proportion/ 
to  their  holdings  in  the  distribution  of  surplus  profits. 
These  matters,  however,  are  specifically  determined 
by  the  provisions  of  the  railroad  charter  or  by  the 
terms  of  the  contract  under  which  the  shares  of  stock 
are  issued. 

The  voting  privilege  attached  to  shares  of  capital 
stock  may  be  surrendered  by  the  stockholder  through 
a  voting  trust  agreement.  This  means  that  the  actual 
certificates  of  capital  stock  are  lodged  with  several 
trustees,  who  hold  the  same  in  the  interests  of  the 
owners,  and  who  issue  in  return  voting  trust  certifi- 
cates representing  the  actual  shares.  Thus,  a  majority 
of  stock  of  the  Southern  Railway  is  deposited  with 


20        AMERICAN  RAILROAD  ECONOMICS 

three  voting  trustees  under  a  voting  trust  agree- 
ment which  shall  remain  in  force  until  terminated 
by  a  majority  vote  or  as  long  as  the  trustees  shall 
so  elect.  {The  purpose  of  the  voting  trust  agreement 
is  to  assure  a  permanent  managerial  policy  for  the 
corporation,  y  Since  each  person  or  group  of  persons 
owning  stock  to  which  voting  right  is  attached  has 
as  many  votes  as  the  number  of  such  shares  held, 
managerial  policy  is  determined  by  the  majority 
of  the  number  of  votes  cast.  The  control  of  the 
corporation's  affairs,  therefore,  is  technically  in  the 
hands  of  the  majority  of  shares  exercising  the  voting 
privilege.  In  order  that  one  or  a  group  of  persons 
may  obtain  the  administrative  control  of  a  railroad 
company  it  is  merely  required  that  they  own  or 
control  the  voting  privilege  possessed  by  a  majority 
of  voting  shares. 

As  a  rule,  railroad  stockholders,  unless  they  hold  a 
substantial  interest  in  the  voting  capital  stock, 
do  not  exercise  their  voting  privilege  in  person.  The 
voting  can  only  be  done  by  attendance  at  stock- 
holders' meetings.  The  wide  distribution  of  rail- 
road stockholders  throughout  the  world  prevents 
many  from  attending  these  meetings.  Moreover, 
the  expense  in  many  instances  is  too  great.  The 
stockholders'  meetings  of  American  railroads  there- 
fore are  usually  perfunctory  affairs.  They  are  at- 
tended mainly  by  the  directors  who  constitute  the 
controlling  group  of  stockholders.  In  fact,  no  lead- 
ing American  railroad  company  could  accommodate 
in  one  building  at  one  time  the  total  number  of  its 


RAILROAD  SECURITIES  21 

shareholders.  The  Pennsylvania  Railroad  Company, 
on  June  30,  1912,  had  over  80,000  separate  stock- 
holders; the  Union  Pacific,  New  York  Central  and 
other  leading  companies  also  have  their  shares  in 
a  large  number  of  hands. 

Most  of  the  railroad  stockholders  that  exercise 
the  voting  privilege  do  so  through  proxy.  It  is  the 
practice  of  the  directors  of  each  corporation  con- 
jointly to  request  these  proxies.  Proxy  blanks  by 
which  the  voting  privilege  is  transferred  are  usually 
inserted  with  the  notices  of  stockholders'  meetings. 
It  occasionally  happens  that  interests  opposed  to 
the  controlling  management  of  the  railrodd  also 
request  proxies.  In  this  way  stockholders  can  have 
a  voice  in  the  selection  of  the  management  and  the 
policy  of  the  company. 

The  contest  for  the  managerial  control  of  the 
Illinois  Central  Railroad  illustrates  an  appeal  for 
proxies  by  opposing  interests.  The  late  E.  H.  Har- 
riman,  through  the  purchase  by  the  Union  Pacific 
Railroad  of  approximately  $33,000,000  of  Illinois 
Central  Railroad  stock,  acquired  a  predominant 
influence  in  the  affairs  of  the  company.  He  was 
opposed  to  the  policy  of  its  president,  Mr.  Stuyvesant 
Fish,  and  succeeded  in  removing  him  from  this 
oflSce.  Mr.  Fish,  also  a  large  owner  of  Illinois  Central 
stock,  in  order  to  regain  his  position  sent  out  a  gen- 
eral request  for  proxies  to  be  used  at  the  next  stock- 
holders' meeting  convened  for  the  purpose  of  electing 
directors.  Contests  of  this  kind  are  frequently 
avoided  by  one  of    the  contestants  obtaining   by 


22        AMERICAN  RAILROAD  ECONOMICS 

purchase  or  otherwise  enough  shares  to  control  the 
election. 

The  certificates  of  capital  stock  of  railroad  and 
other  corporations  are  negotiable.  Thus,  the  right 
of  proprietorship  can  be  disposed  of  at  any  time. 
The  transfer  of  the  ownership,  however,  •  must  be 
known  to  the  corporation.  In  other  words,  the  legal 
transfer  can  take  place  only  by  a  record  on  the  books 
of  the  corporation  and  through  an  authorized  transfer 
agent.  Hence,  each  corporation  has  a  register  of 
stockholders.  This  is  known  as  the  "Stock  Book." 
In  most  States  it  is  the  only  book  of  account  to  which 
the  stockholder  of  a  corporation  has  legal  access. 
The  stockholder  may  thus  know  who  are  the  other 
participants  in  the  proprietorship  of  the  company 
and  the  amount  of  the  holdings  of  each. 

Classes  of  Capital  Stock:  The  capital  stock  of 
American  railroads  are  of  two  general  classes; 
(a)  Preferred  Stock  and  (b)  Common  Stock.  In 
Canada  and  Great  Britain  there  is  a  third  class 
known  as  Debenture  Stock,  This  consists  of  shares 
which  are  issued  with  the  agreement  to  pay  abso- 
lutely at  specified  intervals  a  fixed  rate  of  return. 
It  is  therefore  a  form  of  irredeemable  indebtedness 
bearing  a  stipulated  rate  of  interest.  The  holder  is 
usually  entitled  to  a  voting  privilege. 

Preferred  Stocks.  Preferred  Stocks  may  be  First 
Preferred,  Second  Preferred,  Third  Preferred  and 
the  like.  They  are  so  called  because  in  their  order 
they  have  prior  claims  upon  earnings.  Thus, 
the    first   preferred    has    the    first  claim   up  to  a 


RAILROAD  SECURITIES  23 

specified  rate  of  dividend,  then  the  second  pre- 
ferred's  claim  is  to  be  met.  If  there  are  no  other 
classes  of  preferred  stock  the  common  stock  par- 
ticipates as  a  claimant.  Preferred  stocks  may  be 
cumulative  or  non-cumulative,  participating  or  non- 
participating.  If  cumulative,  the  amount  by  which 
the  dividend  at  any  dividend  period  fails  to  reach 
the  stipulated  rate  is  carried  forward  to  continue 
as  a  claim  upon  earnings  until  satisfied;  if  non- 
cumulative,  the  unpaid  amount  of  the  dividend  lapses. 
If  a  preferred  stock  is  participating,  it  is  not  limited 
to  a  sti^ulated^maximum ^te  of^ dividend,  but  is 
entitled  to  participate  in  further  dividends,  in  ac- 
cordance with  the  terms  under  which  the  stock 
is  issued;  if  non-participating,  it  is  limited  to  the 
stipulated  rate. 

Only  a  few  American  railroad  corporations  have 
more  than  one  kind  of  preferred  stock.  The  Erie  and 
the  Reading  Company,  for  example,  have  both 
First  and  Second  Preferred  shares,  all  of  which 
participate  in  earnings  in  their  order  up  to  4  per 
cent,  of  their  par  value.  This  division  of  preferred 
shares  into  classes  is  the  result  of  corporate  reorgani- 
zation and  readjustment  of  capitalization.  Its 
purpose  is  to  meet  the  demands  of  preference  claims 
against  the  bankrupt  corporation  by  giving  in  return 
a  preference  claim  up  to  a  fixed  rate  on  the  surplus 
earnings  of  the  newly  created  concern. 

Railroad  preferred  stocks,  with  but  few  exceptions, 
are  non-cumulative.  If  dividends  are  not  earned  or 
paid  in  any  year,  they  lapse  and  the  deficiency  is 


U        AMERICAN  RAILROAD  ECONOMICS 

never  made  up.  Thus,  the  Southern  Railroad  Com- 
pany did  not  pay  dividends  on  its  preferred  shares 
from  October,  1907,  to  April,  1911,  though  during 
the  greater  part  of  that  period  the  money  required 
for  this  purpose  had  been  earned.  The  Erie  Railroad, 
likewise,  for  several  years  has  not  paid  any  dividends 
on  its  two  classes  of  preferred  stock.  Thus,  the 
payment  of  preferred  dividends  is  largely  a  matter 
for  the  discretion  of  the  directors.  The  only  restric- 
tion on  the  directors  is  that  they  are  not  permitted 
to  pay  in  any  period  a  dividend  to  common  share- 
holders until  the  maximum  rate  on  the  preferred 
stock  has  been  paid  in  that  period.  The  Rutland 
Railroad  is  the  only  railroad  of  any  importance 
which  has  preferred  stock  on  which  the  unpaid 
dividends  are  cumulative.  In  fact,  owing  to  privilege 
given  the  common  stockholders  to  exchange  their 
shares  into  the  preferred,  almost  all  of  the  capital 
stock  of  this  company  ($9,057,600  of  $9,257,000) 
consists  of  7  per  cent,  cumulative  preferred  stock  on 
which  about  200  per  cent,  unpaid  dividends  have 
accumulated.  The  Pere  Marquette  has  also  a  cumu- 
lative first  preferred  stock.  A  reorganization  of  the 
Company  because  of  bankruptcy  will  probably 
eliminate  this  feature. 

The  preferred  stocks  of  several  leading  railroad 
companies  belong  to  the  participating  class.  They 
participate  under  certain  restrictions  in  profits 
beyond  the  fixed  preference  rate  attached  to  the 
shares.  The  Chicago,  Milwaukee  &  St.  Paul  Pre- 
ferred Stock  is  entitled  to  a  prior  dividend  of  7  per 


RAILROAD  SECURITIES  25 

cent,  annually  before  any  return  can  be  paid  on 
common  shares.  After  the  common  stock  has  re- 
ceived 7  per  cent,  per  annum  both  classes  of  stock 
share  alike  in  further  distributions  from  current 
income.  In  the  case  of  the  Chicago  &  North  Western 
Railroad,  after  both  shares  have  received  dividends 
at  the  rate  of  7  per  cent,  per  annum,  the  preferred 
stock  is  entitled  to  3  per  cent,  additional  before  any 
further  return  can  be  made  on  the  common  shares. 
The  preferred  shares  of  Chicago  &  North  Western, 
however,  do  not  participate  beyond  a  maximum  of 
10  per  cent.  The  Seaboard  Air  Line  has  a  similar 
arrangement  in  the  distribution  of  possible  dividends 
to  shareholders.  Its  preferred  stock  is  entitled  to 
4  per  cent,  in  dividends  annually,  after  which  the 
common  stock  is  to  get  4  per  cent.  Then  the  pre- 
ferred is  entitled  to  a  further  distribution  of  2  per 
cent,  before  additional  returns  can  be  made  to  com- 
mon stockholders. 

The  preferred  stocks  of  many  railroads  are  issued 
with  the  agreement  that  the  company  at  its  option 
has  the  privilege  of  redeeming  these  shares  at  a 
stipulated  price.  This  retirement  privilege  was 
exercised  by  the  Southern  Pacific  Company  in  1909 
when,  approximately,  $75,000,000  of  7  per  cent.  Pre- 
ferred Stock  was  replaced  by  other  securities.  The 
stipulated  redemption  price  was  $115.  The  Hocking 
Valley  Railroad,  likewise,  called  in  $15,000,000  of 
preferred  stock,  for  which  par  value  was  paid  the 
holders.  The  Erie,  and  the  Reading,  both  reserve 
the  right  to  redeem  either  or  both  classes  of  their 


26        AMERICAN  RAILROAD  ECONOMICS 

preferred  shares  at  par.  The  Reading  also  has  the 
option  of  converting  its  second  preferred  stock  at 
any  time,  one-half  into  first  preferred  stock  and 
one-half  into  common  stock.  The  chief  motive  back 
of  the  redemption  of  preferred  stock  is  the  dislike 
of  complications  arising  out  of  the  respective  provi- 
sions regarding  the  rights  and  privileges  of  the 
different  classes  of  capital  stock.  Preferred  shares, 
in  many  cases,  have  preference  in  the  distribution  of 
assets  as  well  as  of  earnings.  Although  a  railroad 
property  is  rarely  liquidated,  it  occasionally  happens 
that  a  part  of  the  assets  can  be  segregated  and  a 
distribution  made  for  the  benefit  of  shareholders. 
Complications  arise  when  a  basis  of  distribution 
equitable  to  both  classes  of  stock  is  sought.  The 
directors  of  the  Union  Pacific  Railroad,  for  example, 
may  experience  some  difficulty  in  any  scheme  to 
separate  from  the  railroad  property  the  large  invest- 
ment holdings  of  the  Company  in  other  enterprises. 
Some  preferred  shareholders  have  claimed  a  right  to 
participate  in  such  distribution.  A  similar  difficulty 
may  occur  in  case  the  Reading  Company  is  compelled 
to  dispose  of  its  coal  properties.  In  this  instance, 
however,  the  Reading  can  exercise  the  redemption 
privilege. 

A  further  complication  may  arise  because  of  the 
division  of  voting  control.  Not  all  preferred  shares 
have  a  voting  right.  When  the  voting  power  is 
given,  in  some  instances  it  has  been  threatened  with 
nullification  by  the  exercise  of  the  redemption  priv- 
ilege.    When  the  preferred  stock  has  equal  voting 


RAILROAD  SECURITIES  27 

rights  with  the  common  and  cannot  be  retired,  the 
administrative  control  will  rest  with  the  class  of 
stock  having  the  largest  number  of  shares  outstand- 
ing. This  naturally  leads  the  controlling  class  to 
favor  a  policy  which  adds  to  the  intrinsic  value  of  its 
own  shares  rather  than  to  the  capital  stock  as  a 
whole.  An  instance  of  this  kind  is  the  controversy 
among  the  St.  Joseph  &  Grand  Island  stockholders. 
The  Union  Pacific  Railroad,  having  obtained  a 
majority  of  common  shares,  acquired  administrative 
control.  One  result  of  this  was  the  cutting  of  the 
dividends  that  had  previously  been  paid  on  the  St. 
Joseph  &  Grand  Island  Preferred  Stock.  Surplus 
earnings  of  the  company  were  applied  to  new  rail- 
road construction.  Some  of  the  preferred  stock- 
holders naturally  felt  aggrieved  and  brought  suit  to 
enjoin  the  Union  Pacific  from  voting  its  shares  at 
the  stockholders'  meetings.  A  way  out  of  the  con- 
troversy is  sought  through  an  offer  of  the  Union 
Pacific  to  buy  up  at  a  stipulated  price  the  stock  of 
dissatisfied  shareholders. 

Significant  provisions,  designed  to  prevent  possi- 
ble neglect  of  preferred  stockholders'  interests,  are 
attached  to  some  issues  of  preferred  stock.  The 
Rock  Island  Company's  preferred  stockholders,  for 
example,  are  entitled  to  elect  a  majority  of  the 
directors.  The  Wisconsin  Central's  preferred  stock- 
holders have  a  similar  right  whenever  the  company 
has  failed  for  a  period  of  two  successive  years  to 
pay  the  prescribed  maximum  preferred  dividend. 
A  more  common  provision  is  the  requirement  of 


28        AMERICAN  RAILROAD  ECONOMICS 

the  consent  of  two-thirds  or  more  of  the  preferred 
stockholders  to  an  authorized  increase  in  the  amount 
of  preferred  shares.  In  some  instances,  consent  is 
also  required  for  the  authorization  of  an  increase 
in  funded  indebtedness.  Increased  capitahzation, 
through  the  issue  of  securities  having  prior  or  equal 
claim  upon  earnings  and  assets,  naturally  ajffects  the 
securities  already  outstanding.  Consequently,  it  is 
only  proper  that  provisions  should  be  made  to  safe- 
guard the  interests  of  each  class  of  security  holder. 

It  would  be  interesting,  if  space  permitted,  to  give 
further  examples  of  the  rights  and  priorities  of 
different  issues  of  railroad  preferred  stocks.  Sufficient 
has  been  told,  however,  to  show  that  the  general 
principle  is  the  same  in  most  cases.  In  brief,  the 
holders  have  preference  as  to  assets  or  to  profits 
or  both,  and  they  also  may  have  a  veto  upon  the 
creation  of  mortgages  or  additional  preferred  shares. 

Common  Stock.  Common  shares  comprise  by  far 
the  largest  part  of  railroad  capital  stock.  American 
railroad  companies  when  first  organized  had  only 
common  shares,  whereas,  at  the  present  time  but  one 
railroad,  viz.,  the  Great  Northern,  has  issued  only 
preferred  shares.^  The  Pennsylvania  Railroad,  the 
New  York  Central  &  Hudson  River,  the  Illinois 
Central,  the  Lehigh  Valley  and  the  Delaware, 
Lackawanna  &  Western,  the  Louisville  &  Nashville, 

*  Because  the  charter  of  the  Great  Northern  Railroad  authorized  an 
issue  of  as  much  preferred  stock  as  the  Company  deemed  proper,  the 
Company  in  1898  surrendered  all  right  to  issue  common  stock.  The 
Great  Northern  stock  is  now  "of  a  single  class  with  uniform  rights 
and  privileges." 


RAILROAD  SECURITIES  29 

and  a  host  of  other  standard  American  railroad 
organizations  with  an  unbroken  and  successful 
history  have  but  one  class  of  capital  stock  outstand- 
ing. Thus,  the  shareholders  of  these  companies 
all  have  the  same  rights  and  privileges;  they  receive 
profits  or  other  distributions  in  accordance  with  the 
number  of  shares  held  by  each. 

The  common  shareholders  are  the  "residual 
claimants"  to  surplus  earnings.  Having  no  claim  to 
a  stipulated  return,  they  share  in  profits  only  after 
all  other  charges  have  been  met.  Except  when 
limited  by  law,  there  are  no  restrictions  on  the 
possible  dividend  rate  on  the  common  stock  shares. 
For  this  reason  common  stock  frequently  has  what 
is  termed  a  speculative  value.  This  means  that  the 
par  value  as  measured  by  market  price  is  not  based  on 
the  actual  rate  of  dividend  received,  but  on  the 
probability  of  increase  or  decrease  in  this  rate.  Thus, 
when  New  York  Central  shares,  paying  5  per  cent, 
dividends  sell  at  a  price  giving  4.4  per  cent,  on  the 
investment,  Chesapeake  &  Ohio  paying  the  same 
rate  gives  6.3  per  cent.  Baltimore  &  Ohio  and 
Pennsylvania  both  distribute  6  per  cent,  annually 
to  shareholders,  but  on  the  same  day  according  to 
stock  market  quotations,  the  investment  yield  on 
Pennsylvania  is  4.8  per  cent,  and  on  Baltimore  & 
Ohio  5.6  per  cent.  Louisville  &  Nashville  stock 
paying  7  per  cent,  dividends  offers  investors  4.4  per 
cent,  when  the  Northern  Pacific,  which  also  pays 
7  per  cent,  offers  5.6  per  cent.  When  one  stock  offers 
a  great  deal  more  to  investors  than  others,  all  other 


so        AMERICAN  RAILROAD  ECONOMICS 

circumstances  being  equal,  it  means  either  a  larger 
dividend  rate  or  larger  actual  or  probable  surplus 
earnings  available  for  dividends. 

The  rights  of  common  shareholders  do  not  imply 
a  full  pro  rata  distribution  of  each  year's  surplus 
profits  available  for  these  shares.  As  in  the  case  of 
non-cumulative  preferred  stock,  the  payment  and 
the  rate  of  dividend  is  dependent  on  the  action  of 
the  company's  directors.  Acting  as  the  adminis- 
trative body,  directors  may  decide  to  withhold  the 
surplus  earnings  in  whole  or  in  part  from  the  stock- 
holders. 

The  investment  value  of  railroad  shares  is  not  alone 
dependent  on  the  annual  dividend  return  received. 
Occasionally  stockholders  receive  extra  dividends, 
or  bonuses.  They  may  also  receive  the  "right"  to 
subscribe  for  new  issues  of  stock  below  the  prevailing 
market  price.  These  "rights"  are  negotiable.  If  the 
shareholder  does  not  wish  to  purchase  the  new  stock 
alloted  to  him  he  can  transfer  the  "right"  to  another 
party.  The  "rights,"  therefore,  generally  have  a 
market  value  and  can  be  converted  into  cash.  Ac- 
cordingly they  do  not  differ  materially  from  extra 
cash  dividends.  Preferred  shareholders,  and  in 
rare  instances,  certain  classes  of  bondholders,  may 
be  granted  participation  in  "rights." 

Extra  dividend  distributions  or  bonuses,  whether 
in  cash  or  in  new  stock  are  familiarly  referred  to  as 
"melon  cutting."  Stock  bonuses  theoretically  repre- 
sent a  reward  to  common  stockholders  for  the  with- 
holding from  them  of  the  surplus  earnings  available 


RAILROAD  SECURITIES  31 

for  dividend  distribution.  In  other  words,  the 
company,  by  granting  a  stock  dividend,  may  simply 
be  returning  a  loan  "forced"  from  shareholders. 
This  is  known  as  the  "capitalization  of  surplus." 
This  method  of  obtaining  capital  is  good  financial 
policy  as  long  as  it  is  less  expensive  to  the  railroad 
company  than  borrowing  from  the  public.^ 

Railroad  Funded  Indebtedness.  Funded  Indebted- 
ness, as  defined  in  railroad  finance,  comprises  all 
negotiable  instruments  of  credit  having  a  maturity 
period  of  one  year  or  more.  These  form  a  part  of 
railroad  capitalization,  whereas,  indebtedness  in  the 
form  of  certificates  without  fixed  maturity  dates  or  of 
a  maturity  period  of  less  than  one  year,  is  Current 
Indebtedness  and  is  not  included  in  the  aggregate  of 
railroad  capitalization.  This  distinction  between 
Funded  or  Capital  Indebtedness  and  Current  Indebted- 
ness is  theoretical  and  arbitrary.  It  is,  nevertheless, 
useful  in  comparative  analyses  of  railroad  capitaliza- 
tion and  in  the  compilation  of  capitalization  statis- 
tics. 

The  holders  of  railroad  obligations,  in  their  capac- 
ity as  creditors,  generally  have  no  voice  in  the  ad- 
ministration of  their  debtor  companies.  There  are  a 
few  exceptions,  however.  The  holders  of  two  classes 
of  Erie  Railroad  bonds — (the  Prior  Lien  and  the 
General  Lien  Bonds) — aggregating  approximately 
$84,000,000,  have  proportionately  equal  voting 
rights  with  the  $176,271,300  par  value  of  stock. 
The  Consolidated  Sinking  Fund  Bonds  of  the  Chi- 

*  This  subject  is  considered  further  in  Chapter  XII. 


32        AMERICAN  RAILROAD  ECONOMICS 

cago  and  North  Western  Railroad,  due  February  1st, 
1915,  also  carry  the  voting  privilege. 

Classes  of  Fxrnded  Indebtedness.  Bonds:  Rail- 
road funded  indebtedness  is  usually  classed  under 
two  general  headings.  Bonds  and  Notes.  These,  how- 
ever, are  only  distinguished  by  period  of  maturity. 
Bonds,  as  a  rule,  have  a  maturity  period  of  ten  years 
or  more,  whereas,  Notes  mature  in  from  one  to  ten 
years. 

Railroad  bonds  are  of  various  kinds.  In  general 
they  may  be  classified  as : 

(1)  Mortgage  Bonds 

(2)  Collateral  Trust  Bonds 

(3)  Convertible  Bonds 

(4)  Plain  Bonds  or  Debentures 

(5)  Income  Bonds. 

This  classification  is  not  intended  to  mean  that  each 
railroad  bond  may  be  definitely  assigned  to  one  class 
and  excluded  from  the  others.  Some  issues  have  the 
attributes  of  two  or  more  classes.  Thus,  a  mortgage 
bond  may  also  be  a  collateral  trust  bond,  and  a 
convertible  bond  may  be  either  a  mortgage  bond  or  a 
plain  bond  (debenture).  A  mortgage  bond,  or  a 
collateral  bond,  however,  cannot  be  a  plain  bond. 
This  will  be  made  clear  in  the  description  of  each  of 
the  groups  in  the  classification. 

Railroad  Mortgage  Bonds.  This  class  of  railroad 
bonds,  as  the  name  implies,  is  an  obligation  secured 
by  a  mortgage  or  lien  on  the  whole  or  some  part  of  the 
debtor  company's  property.  They  thus  resemble  a 
negotiable  real  estate  loan  for  which  the  real  estate  is 


RAILROAD  SECURITIES  33 

pledged  as  security.  In  the  case  of  bonds,  however, 
the  loan  is  generally  distributed  among  a  large 
number  of  holders,  who  cannot  assert  their  claim 
against  the  debtor  corporation  individually  and 
independently.  They  must  act  jointly  for  the 
equitable  interests  of  all  and  through  the  medium  of 
a  trustee. 

The  rights  and  equities  of  the  mortgage  bondholder 
are  contained  in  a  written  instrument  known  as  the 
Deed  of  Trust,  Indenture,  or  Mortgage.  Every  holder 
of  any  class  of  bond,  if  he  wishes  to  know  the  exact 
nature  of  his  security  must  consult  the  deed  of  trust. 
This  legal  document  is  a  contract  between  the  rail- 
road issuing  the  bonds  and  a  trustee  acting  for  and 
in  the  name  of  the  bondholders.  The  trustee  is 
generally  a  trust  company  or  a  banking  house. 
Individuals  may  also  act  in  this  capacity. 

Under  the  terms  of  the  deed  of  trust  the  railroad 
company  conveys  and  assigns  unto  the  trustee  all  of 
the  property,  franchises  and  other  possessions  upon 
which  the  bonds  are  to  be  a  mortgage.  The  deed  also 
specifies  the  amount  of  bonds,  and  the  conditions 
under  which  they  may  be  issued.  It  contains, 
moreover,  a  description  of  the  property  to  be  mort- 
gaged so  that  it  may  be  readily  identified.  There  are 
also  provisions  that  the  property  is  to  be  kept  insured 
and  in  repair,  and  there  may  be  also  other  important 
stipulations  designed  to  protect  the  bondholders. 
It  is  usually  specified  that  if  default  is  made  in  the 
performance  of  any  agreement  contained  in  the  deed 
of  trust,  such  as  the  failure  to  pay  interest  upon  the 


34        AMERICAN  RAILROAD  ECONOMICS 

outstanding  bonds,  the  whole  amount  of  the  princi- 
pal then  becomes  due  and  payable.  The  consent  of 
the  holders  of  a  specijfied  majority  of  the  bonds  is 
usually  required  to  determine  whether  the  mortgaged 
property  is  to  be  sold  or  disposed  of  for  their  benefit 
as  creditors. 

Railroad  mortgage  bonds  usually  bear  a  fixed  rate 
of  interest  and  mature  after  a  definite  period.  The 
company,  however,  may  have  the  option  of  retiring  a 
part  or  all  of  the  bonds  of  an  issue  at  a  stipulated 
price  before  maturity  date.  Usually  the  railroad 
property  upon  which  the  bond  is  a  lien  consists  of  a 
certain  portion  of  roadbed  and  track.  In  this  way  the 
bondholder  may  determine  the  relation  of  the  face 
value  of  the  bonds  to  the  length  of  mortgaged  mileage. 
For  example,  if  $10,000,000  of  the  bond  issue  is 
outstanding  and  the  length  of  the  railroad  property 
mortgaged  is  250  miles,  the  issue  is  at  the  rate  of 
$40,000  per  mile,  provided  there  are  no  prior  liens. 
Whether  this  rate  is  high  or  low  depends,  among 
other  things,  on  the  actual  cost  of  the  property,  its 
permanency  and  its  earning  capacity.  Of  course,  the 
mortgage  may  cover  other  and  more  costly  property 
than  the  roadbed  and  track.  This  factor,  along  with 
many  others,  should  be  determined  in  estimating 
the  value  of  mortgage  bonds. 

The  mortgage  bonds  are  variously  named  as  Prior 
Lien,  First  Mortgage,  Second  Mortgage,  General 
Mortgage,  Refunding  Mortgage,  etc.  A  single  issue 
may  have  a  combination  of  two  or  more  of  these 
adjectives.     The  theoretical  distinction  between  a 


RAILROAD  SECURITIES  35 

first  and  second  mortgage  is  readily  understood.  The 
public,  however,  may  be  misled  through  the  names 
of  some  bond  issues.  Thus,  the  Toledo,  St.  Louis 
&  Western  Railroad  has  a  3J^  per  cent.  Prior 
Lien  Bond  issue  of  $9,500,000  and  a  4  per  cent. 
First  Mortgage  Bond  issue  of  $6,500,000.  The  latter, 
however,  constitutes  an  inferior  mortgage  on  the 
property  securing  the  Prior  Lien  Bonds.  A  similar 
deception  may  arise  from  the  name  "First  and 
Refunding  Mortgage."  In  this  instance  the  issue 
may  constitute  a  first  mortgage  on  a  very  small  part 
of  the  property  and  a  secondary  or  inferior  lien  on 
the  remainder.  Thus,  the  Denver  &  Rio  Grande 
Railroad  authorized  an  issue  of  $150,000,000  of  First 
and  Refunding  5  per  cent.  Gold  Bonds.  On  June  30, 
1912,  there  were  $33,944,000  of  these  outstanding. 
They  then  constituted  a  first  mortgage  on  but  129 
miles  of  railroad  and  an  inferior  lien  (subject  to 
prior  liens  of  $82,500,000)  on  2,400  miles.  Evidently, 
there  was  very  little  basis  for  the  term  "First  Mort- 
gage" at  the  time  of  issue. 

On  many  of  the  large  railroads  a  distinction  exists 
between  General  Mortgages  and  Divisional  Mortgages. 
The  lien  of  the  divisional  mortgage  is  localized, 
covering  the  property  of  a  branch  line  or  division, 
whereas,  the  general  mortgage  usually  covers,  sub- 
ject to  prior  liens  if  any,  the  property  as  a  whole. 
For  various  reasons,  a  divisional  mortgage,  other 
things  being  equal,  has  not  the  intrinsic  merits  of  a 
mortgage  covering  the  main  property  of  a  railroad 
company.    This  arises  chiefly  from  the  fact  that  a 


36        AMERICAN  RAILROAD  ECONOMICS 

division  or  branch  of  a  large  railroad  system  is  not  an 
independent  transportation  unit.  Its  value  and  its 
earning  power  are  dependent  on  the  aflSliation  with 
the  main  lines  of  the  railroad. 

Collateral  Trust  Bonds.  These  differ  in  one  essen- 
tial particular  from  mortgage  bonds.  In  place  of 
physical  property  they  are  secured  by  a  pledge  of 
securities  deposited  with  a  trustee.  Collateral  trust 
bonds,  therefore,  may  be  an  indirect  first  lien  on 
property  through  the  pledging  of  first  mortgage  bonds 
as  security.  When  stocks  are  pledged  as  collateral, 
there  is  a  lien  upon  the  equities  represented  by  this 
class  of  securities.  Frequently  two  or  more  classes 
of  securities  are  pledged  for  one  issue  of  collateral 
trust  bonds.  In  addition,  a  direct  lien  may  be 
granted  on  physical  property  as  further  security. 
Thus  a  collateral  trust  bond  may  be  partly  a  mort- 
gage bond,  just  as  a  mortgage  bond  may  be  partly 
secured  by  pledge  of  securities  as  collateral.  Col- 
lateral trust  bonds  are  issued  under  a  deed  of  trust 
similar  to  that  of  mortgage  bonds.  The  pledged 
securities  are  conveyed  "in  trust"  to  a  trustee,  with 
whom  they  are  generally  deposited.  As  long  as  there 
is  no  default  in  the  interest  or  principal  on  any  of  the 
collateral  bonds,  the  railroad  owning  the  pledged 
securities  is  entitled  to  all  the  income  accruing  from 
such  ownership.  The  railroad  company  may  also 
be  given  the  privilege,  subject  to  the  sanction  of  the 
trustee,  to  substitute  other  securities  for  any  or  all 
of  those  pledged.  These  and  other  rights  and 
privileges  are  usually  defined  in  the  deed  of  trust. 


RAILROAD  SECURITIES  37 

In  every  case  the  terms  of  the  contract  should  be! 
known  and  understood  by  those  who  wish  to  invest 
in  collateral  trust  bonds. 

The  investment  value  of  collateral  trust  bonds 
depends,  first,  upon  the  character  and  intrinsic  value 
of  the  pledged  securities  and,  secondly,  upon  the 
general  credit  and  financial  standing  of  the  company 
pledging  the  security.  As  a  rule,  the  terms  under 
which  collateral  trust  bonds  are  issued  require  a 
guarantee  on  the  part  of  the  issuing  company  to  pay 
both  interest  and  principal,  regardless  of  whether  or 
not  the  pledged  securities  can  be  sold  or  otherwise 
disposed  of  at  the  stipulated  redemption  price  of  the 
collateral  bonds.  Every  precaution,  however,  is 
desirable  to  maintain  the  intrinsic  value  of  the 
collateral.  An  example  of  how  this  can  be  done  is 
furnished  by  clauses  in  the  deed  of  trust  of  the 
Atlantic  Coast  Line  Collateral  Trust  4  per  cent. 
Gold  Bonds.  This  issue  was  originally  secured  by 
$35,000,000  of  Louisville  &  Nashville  Railroad 
stock.  Since  the  collateral  constitutes  a  majority 
stock  ownership  and  controlling  interest  in  the 
Louisville  &  Nashville  Railroad,  precautions  are 
taken  that  this  controlling  interest  shall  not  be 
impaired.  The  Atlantic  Coast  Line,  therefore, 
covenants  that  whenever  the  Louisville  &  Nash- 
ville issues  additional  stock  the  same  proportion 
of  the  new  stock  as  of  the  Louisville  &  Nash- 
ville's old  stock  already  held  shall  be  deposited 
as  further  collateral  for  the  bond  issue.  Moreover, 
the  Atlantic  Coast  Line  in  the  exercise  of  its  ad- 


38         AMERICAN  RAILROAD  ECONOMICS 

ministrative  control  over  the  Louisville  &  Nashville 
agrees 

"that  it  will  cause  all  repairs,  renewals  and  replacements,  necessary  to 
maintain  the  railroads,  structures,  locomotives,  cars  and  other  equip- 
ment, tools  and  other  property  of  the  Louisville  &  Nashville  Company 
in  their  present  good  order  and  condition,  to  be  made  out  of  the  earnings 
of  said  railroads  and  other  property." 

There  are  additional  clauses  in  collateral  trust  in- 
dentures having  the  purpose  of  preserving  the  equity 
and  value  of  the  stock  or  other  securities  pledged  as 
collateral. 

Convertible  Bonds.  This  class  of  bonds  existed  in 
the  early  days  of  railroad  construction,  but  has  come 
into  prominence  only  in  the  past  few  years.  Similar 
to  other  railroad  bonds  they  are  a  direct  obligation 
of  the  issuing  company,  maturing  in  a  certain  period 
of  time,  and  bearing  a  fixed  rate  of  interest.  In 
addition,  however,  they  carry  the  privilege  to  the 
holders  of  exchanging  them  for  a  class  of  capital 
stock  of  the  debtor  company  under  prescribed  terms 
and  conditions.  This  convertibility  gives  the  bonds  a 
speculative  value,  which  causes  their  market  price  to 
fluctuate  within  certain  limits  in  accordance  with  the 
market  price  of  the  stock  into  which  they  may  be 
converted.  The  conversion  is  arranged  at  a  fixed 
rate.  It  may  be  $100  par  value  bonds  for  one  $100 
share  of  stock,  or  it  may  be  $125  of  bonds  for  one 
share  of  stock.  Since  railroads  are  not  generally 
permitted  to  issue  stock  under  par  value  the  conver- 
sion figure  is  rarely  at  less  than  one  $100  share  of 
stock  for  $100  of  bonds.   The  Erie  Railroad,  however. 


RAILROAD  SECURITIES  39 

has  a  bond  issue  which  is  convertible  into  the  com- 
mon stock  of  the  company  at  $100  in  stock  for  $60  in 
bonds. 

The  holder  of  a  convertible  bond,  in  addition  to 
an  assured  rate  of  return  on  the  bond,  has  an  oppor- 
tunity to  benefit  in  the  railroad's  financial  progress. 
The  value  of  the  bond  tends  to  appreciate  with  the 
value  of  the  stock.  If  the  bonds  sell  above  the  con- 
version figure  but  below  the  price  of  the  stock  an 
intending  purchaser  of  the  stock  will  save  by  buying 
the  bonds  and  converting  them  into  stock.  If,  how- 
ever, the  stock  is  selling  below  the  conversion  figure 
price  fluctuations  in  the  stock  up  to  this  point  do 
not  necessarily  affect  the  price  of  the  bond.  The 
bonds  may  then  retain  a  higher  market  value  than 
the  stock  since  this  market  value  will  be  based  on 
the  rate  of  interest  and  the  security  attached  to  the 
bond. 

As  a  rule  convertible  bonds  are  not  a  direct  lien 
on  any  property.  There  are  exceptions,  however. 
In  1909,  the  Missouri  Pacific  issued  $29,800,000  of 
Convertible  First  &  Refunding  Mortgage  5  per  cent. 
Bonds,  Series  A,  which  are  convertible  dollar  for 
dollar  into  stock,  at  option  of  holder,  from  Septem- 
ber 1,  1912,  to  September  1,  1932. 

In  a  number  of  convertible  issues  the  equity  of 
the  holders  is  safeguarded  by  a  provision  which 
requires  that  in  the  event  of  the  company  creating 
a  new  mortgage  on  its  property,  except  for  refund- 
ing purposes,  the  convertible  bonds  are  to  be  equally 
secured    thereby.      In    1910,    stockholders    of    the 


40        AMERICAN  RAILROAD  ECONOMICS 

Chesapeake  &  Ohio  authorized  an  issue  of  $37,000,000 
of  ^}/2  per  cent,  convertible  bonds  with  a  provision 
of  this  kind.  The  next  year,  a  new  mortgage  was 
authorized  to  secure  an  issue  of  not  exceeding 
$125,000,000  of  5  per  cent.  20  year  gold  bonds. 
Accordingly,  under  the  terms  of  this  mortgage  the 
4/^  per  cent.  Convertible  Bonds  are  on  a  parity  with 
the  new  mortgage  bonds  in  respect  to  all  liens  on 
property  owned  by  the  railroad  company  April  28, 
1910,  the  date  of  the  issue  of  the  convertible  bonds. 
Plain  Bonds,  or  Debentures,  as  they  are  called, 
are  without  the  mortgage  feature.  They  are  obliga- 
tions issued  on  the  faith  and  credit  of  the  company. 
Nonspecific  property  or  franchises  are  pledged  for 
their  security.  Because  of  the  absence  of  a  definite 
pledge  of  property,  debentures  are  issued  and  sold 
mainly  by  the  richest  and  strongest  of  the  railroad 
companies.  American  investors  appear  to  demand 
the  assurance  of  a  lien  or  some  countervailing  fea- 
ture, which  in  case  of  default  or  bankruptcy  will 
give  them  a  preference  among  general  creditors. 
This  demand  is  fostered  by  State  laws  which  prohibit 
insurance  companies,  savings  banks  and  similar 
institutions  from  investing  in  any  other  railroad 
bonds  than  mortgage  bonds.  Debenture  bonds  may 
occasionally  become  mortgage  bonds  because  of 
an  agreement  of  the  issuing  company  not  to  place 
a  new  mortgage  upon  its  lines  unless  the  deben- 
tures are  also  secured  thereunder.  Thus,  the  New 
York  Central  &  Hudson  River  Railroad  authorized 
$50,000,000    of    4  per  cent,   debentures  which  are 


RAILROAD  SECURITIES  41 

issued  with  the  agreement  that  so  long  as  any  of 
these  bonds  remain  outstanding  the  Company  will 
not  place  any  new  mortgage  upon  its  property  with- 
out also  including  therein  all  outstanding  deben- 
tures of  this  issue.  This  agreement,  however,  does 
not  prevent  renewal  or  extension  of  any  existing 
mortgage.  Similarly,  the  several  issues  of  deben- 
tures of  the  Atchison,  Topeka  &  Santa  Fe  Railroad 
(including  those  convertible  into  stock)  must  be 
secured  by  any  future  mortgage  covering  the  lines 
owned  by  the  railroad  at  the  time  the  debenture  issue 
was  made.  Provisions  of  this  kind  tend  to  safeguard 
the  equities  of  plain  bonds. 

Income  Bonds.  This  class  of  bonds  form  but  a 
very  small  portion  of  railroad  funded  obligations. 
They  are  usually  known  as  "adjustment"  Konds, 
from  the  fact  that  they  are  generally  created  at  re- 
organizations in  which  a  financial  adjustment  is 
accomplished  by  reduction  in  fixed  charges.  Holders 
of  second  or  junior  lien  bonds  may  then  be  permitted 
to  exchange  their  holdings  for  income  bonds.  Unlike 
other  classes  of  bonds,  "incomes"  do  not  have  a 
claim  to  an  interest  return  from  the  issuing  com-  , 
pany  unless  earnings  are  available  for  this  purpose. 
These  bonds,  therefore,  as  a  claimant  of  profits  are 
in  much  the  same  position  as  preferred  stock.  There 
is  one  essential  difference,  however.  When  the 
interest  on  income  bonds  is  earned  by  the  issuing  » 
company  it  must  be  paid.  The  directors  have  no 
discretion  in  the  matter.  This  is  not  the  case  with 
preferred  stock  dividends.     Even  when  earned  by 


42         AMERICAN  RAILROAD  ECONOMICS 

the  company,  the  directors  have  the  privilege  of 
withholding  payments.  Income  bonds  may  have 
the  cumulative  feature.  This  prohibits  the  payment 
of  any  dividends  on  capital  stock  until  all  arrearages 
in  interest  on  the  income  bonds  have  been  made 
up.  The  Seaboard  Air  Line  Adjustment  Mortgage 
Bonds,  for  example,  are  entitled  to  cumulative  in- 
terest at  5  per  cent,  to  be  payable  as  earned  in  install- 
ments of  13^  per  cent,  or  multiples  thereof.  No  divi- 
dends are  to  be  paid  on  Seaboard  Air  Line  stock 
until  all  overdue  interest  on  these  bonds  is  paid  in 
full.  The  Central  of  Georgia  Railroad  Income  Bonds 
have  not  this  cumulative  feature.  This  resulted  in 
the  loss  to  the  holders  of  the  full  5  per  cent,  interest 
for  a  number  of  years.  Dissatisfaction  on  the  part 
of  the  holders,  claiming  that  the  full  interest  on  the 
bonds  was  earned  but  withheld,  led  to  litigation.  The 
final  outcome  was  an  offer  by  the  Illinois  Central  Rail- 
road (the  owner  of  the  Central  of  Georgia's  capital 
stock)  to  purchase  the  income  bonds  at  a  fixed  price. 
Railroad  Short  Term  Securities.  Notes:  Railroad 
notes  do  not  differ  essentially  from  bonds.  They 
are  secured  in  the  same  way  and  may  be  mortgage 
notes,  collateral  trust  notes  or  debenture  notes.  Their 
denomination  is,  with  few  exceptions,  the  same  as 
bonds,  i,  e,,  in  $500,  $1,000  or  multiples  thereof. 
The  only  distinction  between  notes  and  bonds,  as 
already  pointed  out,  lies  in  the  period  of  maturity. 
In  railroad  finance  a  short  term  obligation  or  "note" 
may  run  from  one  to  ten  years.  Obligations  issued 
to  mature  in  a  longer  period  are  generally  designated 


RAILROAD  SECURITIES  43 

as  bonds.  Frequently  notes  are  issued  to  mature 
serially.  This  means  that  a  certain  proportion  is 
to  be  "called"  {i.  e.,  redeemed),  at  specified  intervals, 
and  each  note  of  a  total  issue  bears  its  maturity  date. 

A  popular  kind  of  railroad  serial  note  is  the  Equip- 
ment Trust  Certificate,  This  is  secured  by  a  lien  on 
certain  railroad  rolling  equipment,  either  locomo- 
tives or  cars,  or  both.  Since  the  equipment,  through 
use,  gradually  depreciates  and  is  finally  "scrapped," 
the  aim  is  to  maintain  the  equity  value  of  the  certif- 
icates by  having  a  portion  of  them  mature  each  year. 
The  longest  maturity  does  not  exceed  the  estimated 
period  of  usefulness  of  the  equipment.  According 
to  Interstate  Commerce  Commission  statistics,  there 
were  outstanding  June  30,  1912,  $318,182,259  of 
railroad  equipment  obligations.  Among  these  are 
the  obligations  of  railroads  enjoying  the  highest 
reputation  for  financial  soundness. 

Railroad  notes  are  generally  regarded  as  temporary 
means  of  financing.  As  a  rule  they  are  replaced  at 
or  before  maturity  by  long  term  obligations.  It  is 
frequently  the  practice  to  deposit  with  a  trustee  the 
securities  which  are  to  replace  the  notes  so  that  these 
may  serve  as  collateral.  When  the  credit  of  the 
issuing  company,  or  the  general  condition  of  the 
money  market  warrants,  the  pledged  bonds  may 
be  sold  and  the  notes  paid  off  with  the  proceeds. 
Thus,  a  railroad  company  generally  reserves  the 
privilege  of  "calling  in"  the  notes  before  maturity. 
The  redemption  price  is  stipulated  in  the  indenture 
under  which  the  notes  are  issued. 


CHAPTER  III 

RAILROAD    SYSTEMS   OF   THE  UNITED    STATES 

Development  of  Railroad  Systems.  The  individual 
lines  comprising  the  vast  net  work  of  American  rail- 
roads for  the  most  part  can  be  conveniently  grouped 
in  accordance  with  system  organization  and  geo- 
graphical location.  This  arises  from  the  fact  that 
railroad  expansion  followed  along  the  important 
channels  of  trade  between  great  centers  of  traffic. 
A  number  of  ill-defined  geographical  zones  were 
gradually  established,  each  comprising  a  region  of 
large  traffic  interchange.  These  regions  marked  the 
territorial  limits  of  many  of  the  great  railroads  and 
became  the  basis  of  regional  freight  rate  structures.* 
Thus,  in  the  early  years  of  American  rail  transporta- 
tion, the  aim  was  to  connect  the  Atlantic  ports  with 
the  Great  Lakes  and  with  the  Ohio  and  Mississippi 
River  settlements.  The  pioneer  American  railroad 
enterprise.  The  Baltimore  iSc  Ohio  Railroad,  as  its 
name  implies  was  built  to  handle  the  traffic  inter- 
change which  had  formerly  passed  by  turnpike  be- 
tween the  tide-water  sections  of  the  East  to  the  fer- 
tile region  beyond  the  Alleghenies.  The  proposed 
construction  of  the  Erie  Railroad  by  the  State  of 
New  York  in  the  early  thirties  had  the  paramount 

^  See  McPherson,  "  Railroad  Freight  Rates,"  etc..  Chapter  VII. 

44 


RAILROAD  SYSTEMS  OF  THE  U.  S.         45 

object  of  facilitating  and  promoting  the  intercourse 
between  the  metropolis  of  the  State  and  the  Lake 
Erie  ports. 

In  course  of  time,  railroad  development  advanced 
sufficiently  to  permit  through  shipments  from  one 
extreme  of  the  natural  geographical  divisions  to 
another.  The  railroad  companies  whose  lines  af- 
forded this  continuous  transportation  came  to  be 
known  as  trunk  lines.  This  distinguishes  them  from  ^ 
local  lines  which  serve  only  intermediate  sections 
and  which  must  interchange  their  long  haul  ship- 
ments with  other  lines.  Thus,  a  trunk  line  may  be 
defined  as  a  railroad  whose  principal  tonnage  origi- 
nates and  moves  on  its  own  lines  between  two  great 
points  of  traffic  interchange.  As  regards  traffic 
movement,  therefore,  a  trunk  line  is,  relatively  speak- 
ing, an  independent  organic  unit.  It  is  not  de- 
pendent on  other  companies  either  to  receive  or  to 
furnish  the  bulk  of  its  "through"  shipments.  Of 
course,  these  distinctions  are  relative  and  are  in- 
fluenced by  traffic  conditions.  There  are  railroads 
which  are  neither  trunk  lines  nor  local  lines.  Chief 
among  these  are  the  roads  which  haul  some  important 
commodity,  such  as  coal  or  ore,  from  the  point  of 
origin  to  a  primary  market.  The  Philadelphia  & 
Reading,  the  Lehigh  Valley  and  other  leading 
"coalers"  are  certainly  not  local  lines. 

The  application  of  the  term  trunk  line  naturally 
varies  as  the  distance  between  principal  centers  of 
traffic  interchange  increases.  Originally,  the  in- 
dividual trunk  lines  of  the  East  had  their  termini 


46        AMERICAN  RAILROAD  ECONOMICS 

in  the  principal  Atlantic  ports  at  one  end  and  in 
Pittsburgh,  Buffalo  or  other  points  just  beyond  the 
Alleghenies,  at  the  other  end.  The  development 
of  the  region  beyond  the  Ohio  and  the  Mississippi, 
and  the  growth  of  traffic  centers  such  as  Cincinnati, 
St.  Louis  and  Chicago,  increased  the  traffic  inter- 
change between  tide- water  and  these  points.  The 
leading  railroads  extended  their  lines  in  conformity 
with  this  trend.  This  was  not  generally  accomplished 
by  the  actual  construction  of  new  extensions.  Local 
and  connecting  roads  had  already  been  built  to  the 
more  distinct  localities.  Consequently,  the  old  es- 
tablished companies,  in  order  to  expand  their  lines 
so  as  to  retain  the  through  traffic,  acquired  by  merger, 
by  purchase  or  by  other  means  the  lines  already 
furnishing  connections  with  the  desired  localities. 
In  this  way,  railroad  systems  developed.  An  in- 
dividual railroad  company  is  no  longer  the  type 
of  a  definite  or  complete  transportation  unit.  A 
combination  or  series  of  lines,  affording,  together, 
through  routes  between  distant  centers  of  commer- 
cial intercourse  is  the  present  enlarged  type  of  a 
railroad  organization.  This  development  has  taken 
place  in  all  geographical  divisions  of  the  United 
States.  The  progress  of  territorial  unification  of 
transportation  companies  is  constantly  reducing  the 
number  of  different  railroad  company  securities 
dealt  in  currently  on  the  public  stock  exchanges. 
Investment  interest  centers  largely  in  the  '' parent'' 
companies  that  have  acquired  a  "system"  of  lines  to 
the  exclusion  of  the  subsidiary  companies  that  have 


RAILROAD  SYSTEMS  OF  THE  U.  S.         47 

been  brought  under  the  "systenj"  control.  The 
latter  are  merely  "subsidiaries,^^  whose  welfare  is 
bound  up  with  the  affairs  of  the  parent  corporation. 
Why  have  the  railroads  expanded  in  order  to 
obtain  as  large  a  share  of  through  traffic  as  possible? 
The  answer  is  that  the  whole  profit  remains  with  a 
railroad  when  a  shipment  is  made  over  its  own  lines 
from  point  of  origin  to  place  of  destination.  Other 
railroads  participate  in  the  profits  when  the  through 
service  is  performed  in  conjunction  with  independent 
and  outside  lines.  The  Lehigh  Valley  Railroad,  for 
example,  begins  at  New  York  and  ends  at  Buffalo. 
It  receives  freight  at  New  York  consigned  to  Chicago 
and  other  points  west  of  Buffalo.  At  Buffalo,  it 
must^turn  over  these  shipments  to  some  other  rail- 
road system.  In  this  instance,  let  us  assume,  the 
connecting  line  is  the  Grand  Trunk  Railway.  The 
latter  conveys  the  freight  as  far  as  Detroit,  whence  the 
shipments  destined  further  west  are  forwarded  by  a 
third  company.  This  is  an  example  of  "through 
routing"  involving  the  participation  of  two  or  more 
independent  railroad  organizations.  The  apportion- 
ment among  them  of  the  revenue  received  from  each 
shipment  is  the  result^of  "prorating."  To  "prorate" 
is  to  join  with  another  railroad  in  making  a  through 
rate  for  a  haul  which  covers  parts  of  both  lines.  This 
rate  is  almost  invariably  less  than  the  sum  of  the 
local  rates  between  the  same  points.  Now,  it  is  very 
probable,  because  of  the  lower  proportionate  rate 
for  "through"  or  "long  haul"  traffic  that  the  Lehigh 
Valley,^  as  its  share  of  the  revenue,  does  not  receive 


48        AMERICAN  RAILROAD  ECONOMICS 

as  large  an  amount  as  it  would  have  received  if  all 
shipments  were  consigned  to  its  western  terminus. 
The  service  performed,  however,  is  the  same  in 
either  case.  It  is,  therefore,  to  the  interest  of  rail- 
road companies  desiring  to  gain  the  full  benefit  of 
"through"  or  "long  haul"  business  to  acquire  a 
system  of  lines  which,  in  combination,  will  cover 
the  points  of  origin  and  destination  of  the  bulk  of  its 
traffic.  This  factor  should  be  fully  considered  in 
estimating  the  traffic  features  of  individual  railroad 
companies. 

It  is  thus  evident,  from  what  has  been  said  in  the 
foregoing  pages,  that  the  railroad  systems  of  the 
United  States  have  developed  both  through  extension 
of  corporate  lines  and  through  annexation  and  affilia- 
tion of  independent  connecting  roads.,  As  the  result 
of  this  unification  more  than  two-thirds  of  the  steam 
railroad  mileage  in  the  United  States  can  be  grouped 
under  less  than  twenty-five  systems,  each  with  a 
centralized  administrative  control.  The  systems 
in  the  order  of  their  mileage,  according  to  Interstate 
Commerce  Commission  classification  at  present  writing 
are  as  follows : 


System  Miles 

New  York  Central 13.342 

Chicago,  Burlington  & 

Quincy 11,779 

Atlantic  Coast  Line  ^ 11,560 

Pennsylvania 11,198 

Atchison,Topeka  &  Sante  Fe  10,601 
Southern  Pacific 10,255 


System  Miles 

Chicago  &  North  Western. .   9,845 

Southern  Railway 9,836 

Chicago,  Milwaukee  & 

St.  Paul 9,737 

Illinois  Central 8,248 

Rock  Island 8,158 

St.  Louis  &  San  Francisco.  .  .    7,525 


^  Includes  the  Louisville  &  Nashville  System. 


RAILROAD  SYSTEMS  OF  THE  U.  S. 


49 


System  Miles 

Union  Pacific 7,383 

Missouri  Pacific 7,279 

Great  Northern 7,113 

New  York,  N.  H.  &  Hartford   6,667 

Northern  Pacific 6,306 

Baltimore  &  Ohio 5,569 

Canadian  Pacific  (in  U.  S.)  . .  .4.768 


System  Miles 

Denver  &  Rio  Grande 3,719 

Missouri,  Kansas  &  Texas.  .  .3,665 

Seaboard  Air  Line 3,091 

Wabash 3,085 

Erie 2,567 

Chesapeake  and  Ohio 2,579 

Reading 2,171 


The  foregoing  list  of  the  leading  railroad  systems 
does  not  imply  that  each  is  operated  independently 
without  affiliation  or  relationship  with  other  systems. 
There  is  a  unity  of  administrative  control  among 
several  of  the  systems.  The  Union  Pacific  through 
part  ownership  of  the  Southern  Pacific  Company 
until  1913  controlled  the  financial  policy  and  the 
operations  of  the  Southern  Pacific  System.  The 
Great  Northern  and  the  Northern  Pacific  Systems, 
besides  being  affiliated  through  personal  control  of 
the  same  financial  interests  have  a  joint  control  of 
the  Chicago,  Burlington  &  Quincy  System.  The 
Missouri  Pacific,  the  Denver  and  Rio  Grande,  and 
the  Wabash  systems  are  also  affiliated  largely  through 
the  personal  influence  of  the  same  financial  interests. 
Together,  from  an  administrative  viewpoint,  they 
may  be  defined  as  a  railroad  system. 

Thus,  the  system  of  grouping  of  railroads  in  the 
United  States  may  be  on  the  basis  of  administrative 
rather  than  traffic  control.  This  administrative 
control  may  be  lodged  with  individuals  or  with 
corporations,  or  with  both  jointly,  as  shown  in  the 
following  list: 


50        AMERICAN  RAILROAD  ECONOMICS 

Systems 
J.  J.  Hill  Group 
Great  Northern 
Northern  Pacific 
Chicago,  Burlington  &  Quincy 

E.  W.  Harriman  Group 
Union  Pacific 
Southern  Pacific  * 
Illinois  Central 
Central  of  Georgia 

Pennsylvania  Group 
Pennsylvania  Lines 
Norfolk  &  Western 

Vanderbilt  Group 

New  York  Central  Lines 

Reading  (jointly  with  Baltimore  &  Ohio) 

Chicago  &  North  Western  System 

Atlantic  Coast  Line  (Walters)  Group 
Atlantic  Coast  Line 
Louisville  &  Nashville 

Missouri  Pacific  (Gould)  Group 
Missouri  Pacific 
Wabash 

Denver  &  Rio  Grande 
Texas  &  Pacific 
International  &  Great  Northern 

E.  H.  Hawlet  Group 

Toledo,  St.  Louis  &  Western 
Minneapolis  &  St.  Louis 
Chesapeake  &  Ohio 
Missouri,  Kansas  &  Texas 

*The  segregation  of  Union  Pacific  Railroad's  holdings  of  Southern 
Pacific  stock,  in  accordance  with  Supreme  Court  decree,  may  result  in 
the  separation  of  the  latter  system  from  this  group. 


RAILROAD  SYSTEMS  OF  THE  U.  S.         51 

J.  P.  Morgan  Group 

New  York,  New  Haven  and  Hartford 

Erie 

Southern  Railway 

Chicago  Great  Western 

Pere  Marquette 

The  Moore-Reed  Group 
Rock  Island 
Lehigh  Valley 

The  progress  of  unification  in  railroad  control  is 
well  indicated  in  the  above  grouping.  In  fact,  of  the 
entire  steam  railroad  mileage  of  the  United  States, 
less  than  one-fourth  may  be  termed  independent. 
This  situation  is  of  particular  significance  to  shippers 
and  to  investors.  The  character  and  resources  of 
the  administrative  control  of  any  business  enterprise 
are  fundamental  elements  of  its  investment  value. 
Profitable  and  satisfactory  railroad  operation  re- 
quires sound  financial  policy  and  eflficient  manage- 
ment. Satisfactory  facilities  for  obtaining  credit 
must  also  be  at  hand.  This  means  that  strong  bank- 
ing interests  capable  of  procuring  necessary  capital 
funds  are  to  be  represented  in  the  management. 
One  of  the  conditions  assisting  in  the  absorption 
of  many  local  lines  by  large  railroad  systems  has  been 
the  inability  of  the  independent  companies  to  obtain  ^ 
with  their  own  resources  proper  banking  support.* 
Methods  of  System  Unification.  The  means  of 
uniting  separate  railroad  corporations  into  a  system 

^  See  "Railroad  Changes  and  their  Relation  to  Credit,"  by  Charles  F. 
Speare»  in  Moody's  Magazine,  April,  1909. 


52         AMERICAN  RAILROAD  ECONOMICS 

are  various.  The  original  method  was  through  cor- 
porate merger.  This  was  the  plan  followed  by  the 
New  York  Central  when  it  consolidated  some  six- 
teen local  lines  operating  between  Albany  and  Buf- 
falo. Legal  restrictions  and  failure  to  satisfy  dis- 
senting shareholders  have  now  rendered  corporate 
consolidations  exceedingly  diflScult.  An  example  is 
afforded  in  the  New  York  Central  &  Hudson  River 
Railroad's  endeavor  to  merge  the  New  York  & 
Harlem  River  Railroad  with  its  own  corporate  lines. 
Though  the  shareholders  of  the  latter  have  been 
offered  $175,  for  each  share  ($50  par  value)  of  stock, 
a  substantial  minority  at  this  writing  is  holding 
out  for  better  terms.  A  further  practical  diflBculty 
against  mergers  is  the  heavy  capital  outlay  involved. 
When  administrative  control  can  be  obtained  through 
the  acquisition  of  a  substantial  part  (usually  51  per 
cent.)  of  the  capital  stock,  the  purpose  of  unification 
in  most  cases  is  gained  as  well  as  through  complete 
merger.  The  investment  outlay  of  the  purchasing 
company,  however,  is  very  much  less.  Herein  lies 
one  of  the  chief  reasons  why  railroad  unification 
in  the  United  States  has  taken  the  form  of  majority 
stock  ownership.  It  has  led  to  the  creation  of  two 
distinct  railroad  administrative  activities;  one,  con- 
sisting of  the  transportation  operations  of  lines 
directly  operated,  the  other  relating  to  investments 
represented  by  stockholdings  in  subsidiary  and 
afl51iated  companies.  Thus,  there  are  railroads  which 
are  in  part  ^'holding  companies*'  and  in  part,  ''operat- 
ing  companies,"    The  importance  of  distinguishing 


RAILROAD  SYSTEMS  OF  THE  U.  S.         53 

between  these  activities  of  railroad  organizations 
cannot  be  too  highly  emphasized. 

There  are  a  few  instances  where  the  administrative 
control  is  lodged  with  a  ^^ holding  company''  operating 
no  railroad  mileage  under  its  corporate  name.  The 
Reading  Company  is  a  type.  This  Company  was 
organized  in  1896  for  the  purposes  of  acquiring  the 
Philadelphia  &  Reading  Railroad  Company  and 
the  Philadelphia  Coal  &  Iron  Company.  Later, 
it  acquired  53  per  cent,  of  the  capital  stock  of  the 
Central  Railroad  of  New  Jersey.  In  addition  to 
these  large  holdings,  the  Reading  Company  has 
miscellaneous  holdings  in  street  railways,  naviga- 
tion and  mining  companies.  But  the  Reading  Com- 
pany, itself,  is  controlled  jointly  by  the  New  York 
Central  and  the  Baltimore  &  Ohio  Systems,  each 
of  which  owns  21.7  per  cent,  of  its  $140,000,000  capi- 
tal stock. 

The  Rock  Island  Company,  whose  shares  are 
dealt  in  on  the  stock  exchanges,  is  another  railroad 
"holding  company."  It  owns  the  entire  capital 
stock  ($145,000,000)  of  the  Chicago  &  Rock  Island 
Railroad  Company  which,  in  turn,  owns  93  per  cent, 
of  the  capital  stock  of  the  Chicago,  Rock  Island 
Pacific  Railway  Company.  The  Southern  Pacific 
Company  is  a  holding  company  of  very  much  broader 
scope  than  the  Rock  Island  and  Reading  companies. 
Organized  under  the  laws  of  Kentucky,  the  Southern 
Pacific  Company  has  acquired  the  capital  stock  of 
a  whole  group  of  separate  railroad  organizations, 
chief  among  which  are  the  Southern  Pacific  Railroad 


54        AMERICAN  RAILROAD  ECONOMICS 

and  the  Central  Pacific  Railroad.  The  totally  owned 
roads  are  called  the  Proprietary  Companies,  Others 
whose  capital  stock  is  only  partially  held,  are  desig- 
nated Affiliated  Companies.  The  different  organiza- 
tions in  the  Southern  Pacific  System  June  30,  1912, 
comprise  the  following: 

Southern  Pacific  Company 

(1)  Controlled;  also  leased  Miles 

Central  Pacific  Ry 2,079 

South  Pacific  Coast  Ry 97 

Southern  Pacific  R.  R 3,501 

Oregon  &  California  R.  R 685 

New  Mexico  &  Arizona  R.  R 88 

Sonora  Ry 264 

(2)  Controlled  by  Southern  Pacific  Company — Operated  by  Com- 
panies owning  them 

Galveston,  Harrisburg  &  San  Antonio  Ry 1,338 

Houston  &  Texas  Central  R.  R 789 

Louisiana  Western  R.  R 207 

Morgan's  Louisiana  &  Texas  R.  R.  &  S.  S 404 

Texas  &  New  Orleans  R.  R 452 

Houston  &  Shreveport  R.  R 40 

Houston  E.  &  W.  Texas  Ry 191 

Southern  Pacific  Co 27 

(3)  Controlled  by  Morgan^ s  Louisiana  &  Texas  R.  R.  &  S.  Co. 
Iberia  &  Vermillion  R.  R 16 

Total .10.114 

Steamship  Lines 4,810 

Other  Proprietary  Companies — 

Arizona  Eastern 364 

Southern  Pacific  R.  R.  of  Mexico 949 

Coos  Bay,  Roseburg  &  Eastern 27 

Corvallis  &  Eastern 146 


Grand  total  of  owned,  leased  and  affiliated  lines  June  30, 1912 .  11.600 


RAILROAD  SYSTEMS  OF  THE  U.  S.         55 

The  Pennsylvania  Company  is  another  example  of 
unification  of  a  group  of  separately  incorporated  lines 
through  a  "holding  company."  This  corporation 
was  chartered  as  far  back  as  1870  with  a  capital 
stock  of  $70,000,000  all  owned  by  the  Pennsylvania 
Railroad  Company.  Although  holding  no  mileage 
in  fee,  the  Pennsylvania  company  operated  or  con- 
trolled, on  January  1,  1913,  railroad  lines  aggregat- 
ing 5,105  miles  of  road,  constituting  the  Pennsyl- 
vania Railroad  System  west  of  Pittsburgh. 

In  addition  to  unification  acquired  through  con- 
solidation and  stock  control,  railroad  system  ex- 
pansion has  been  accomplished  through  lease  of 
separately  incorporated  properties.  In  many  in- 
stances, the  companies  having  leasehold  also  have  a 
controlling  interest  in  the  capital  stock  of  the  leased 
corporation.  Under  whatever  arrangement  the 
leased  lines  are  held  they  are  in  every  case  a  part  of 
directly  operated  mileage  of  the  lessee  and  are  in- 
cluded under  the  reports  of  the  lessee's  operating 
results.  When  the  leasehold  covers  a  very  long  or 
indefinite  period,  as  99  years  or  more,  the  leased  line 
is  to  all  intents  and  purposes  a  part  of  the  lessee's 
corporate  property.  One  important  distinction, 
however,  requires  consideration.  A  leasehold  or- 
dinarily involves  no  capital  outlay  or  readjustment 
of  capitalization.  There  is  no  value  representing  the 
lease  among  assets  or  liabilities.  Hence,  the  leasing 
of  independent  lines  is  the  simplest  method  of  extend- 
ing railroad  system  mileage.  For  this  reason  it  has 
been  followed  extensively  from  early  railroad  times. 


56        AMERICAN  RAILROAD  ECONOMICS 

The  New  York  Central  &  Hudson  River  Railroad 
offers  one  of  the  best  examples  of  the  expansion  of 
mileage  through  lease  of  connecting  lines.  On 
January  1st,  1913,  it  owned  in  fee  806  miles,  whereas, 
its  mileage  operated  under  lease  and  trackage  rights 
aggregated  2,985.  This  does  not  include  the  con- 
trolled mileage  operated  by  subsidiary  companies. 
The  Pennsylvania  Railroad  Company  likewise  oper- 
ates a  large  mileage  under  lease  or  contract.  Of  a 
total  of  4,025  miles  directly  operated,  on  January  1st, 
1913,  2,128  miles  were  owned  in  fee,  and  the  remain- 
ing 1,897  miles  were  operated  under  lease  and  under 
trackage  rights.^ 

Geographical  Location  of  Railroad  Systems.  The 
preceding  paragraphs  have  shown  the  development 
of  railroad  unification  and  system  organization  and 
control.  It  is  our  purpose  now  to  classify  and  briefly 
describe  the  principal  systems  in  accordance  with 
their  geographical  zones.  Although  the  terminal 
demarcations  of  railroad  system  development  have 
corresponded  with  the  familiar  geographical  divi- 
sions of  the  country,  extensions  and  overlappings 
into  sections  beyond  the  zones  of  the  main  lines 
render  a  classification  based  on  territorial  bound- 
aries exceedingly  difficult.  However,  the  following 
system  classification  will  be  found  of  service  in 
studying  railroads  with  respect  to  location  and 
to  traffic  characteristics: 

^  Trackage  Rights  constitute  the  privilege  obtained  through  contract 
to  run  trains  over  the  tracks  of  another  company. 


RAILROAD  SYSTEMS  OF  THE  U.  S.         51 

Group  I.    New  England  Systems 

The  New  York,  New  Haven  &  Hartford  Lines 

Group  II.    Eastern  Trunk  Line  Systems 

The  New  York  Central  System 
Pennsylvania  Railroad  System 
Erie  System 

Baltimore  &  Ohio  System 
Chesapeake  &  Ohio  System 

Group  III.    Anthracite  Systems 

Reading  System 

Delaware,  Lackawanna  &  Western  R.  R. 

Lehigh  Valley  Railroad 

Delaware  &  Hudson  Company 

New  York,  Ontario  &  Western  R.  R. 

Group.  IV    Southern  Systems 

Southern  Railway  System 
Atlantic  Coast  Line  System 
Seaboard  Air  Line  System 

Group  V.    Mississippi  Valley  Systems 

Illinois  Central  System 
Louisville  &  Nashville  System 
St.  Louis  &  San  Francisco  System 
Missouri,  Kansas  &  Texas  R.  R. 
Kansas  City  Southern  Railway 

Group  VI.    Middle  Western  Systems  in  the  Nobth 

Wabash  System 

Toledo,  St.  Louis  &  Western 

Pere  Mtarquette  R.  R. 

Group  VII.    Northwestern  Systems 

Chicago  &  North  Western  System 
Chicago,  Milwaukee  &  St.  Paul  System 


58        AMERICAN  RAILROAD  ECONOMICS 

Group  VII.    Northwestern  Systems. — Continued 
Chicago,  Burlington  &  Quincy  System 
Union  Pacific  Lines 
Northern  Pacific  Lines 
Great  Northern  Railway 
Minneapolis,  St.  Paul  &  Sault  Ste  Marie 
(Canadian  Pacific  in  U.  S.) 

Group  VIII.    Southwestern  Systems 

Southern  Pacific  System 
Atchison  System 
Missouri  Pacific  System 
Rock  Island  System 

The  foregoing  list  comprises  only  the  important 
railroad  systems  in  the  United  States.  There  is  no 
claim  of  completeness.  A  number  of  independent 
railroad  companies  whose  securities  are  actively 
dealt  in  are  operated  without  a  "system"  adminis- 
trative control.  In  view  of  the  unification  movement, 
however,  these  continuously  tend  to  be  reduced 
in  importance.  One  of  the  causes  retarding  the  merg- 
ing of  independent  lines  with  existing  systems  is 
the  Sherman  Anti-Trust  Act.  This  law  is  applied 
to  railroads  as  prohibiting  identical  control  of  parallel 
and  competing  lines.  Thus,  the  Pennsylvania  Rail- 
road Company,  after  the  Supreme  Court's  Northern 
Securities  Decision,  relinquished  its  control  over 
the  Baltimore  &  Ohio  Railroad  by  disposing  of  one- 
half  of  its  holdings  in  that  company.  More  recently 
the  Union  Pacific  was  compelled  to  segregate  its 
holdings  of  Southern  Pacific  stock  on  the  ground 
that  this  ownership  constituted  a  restraint  of 
trade. 


RAILROAD  SYSTELIS  OF  THE  U.  S.         59 

I.  New  England  Systems:  The  New  York.^New 
Haven  &  Hartford  is  the  only  great  railroad  system 
that  has  its  principal  situs  in  New  England.  In  its 
control  over  New  England  rail  transportation  it  is 
far  ahead  of  other  interests.  The  leading  lines  em- 
braced within  its  system  organization  (exclusive 
of  electric  railways  and  steamship  companies)  on 
June  30,  1912,  was  as  follows: 

Road  Location  Miles 

New  York,  New  Haven  &  Hartford  . .  .      Southern  New  England.  .  2,042 

Boston  &  Maine  ^ Central  &  Northern  New 

England 2,290 

Maine  Central  (Controlled  by  Boston 

&  Maine) Maine 1,164 

New  York,  Ontario  &  Western New   York   City   to  Os- 
wego on  Lake  Ontario .    566 

In  addition  to  the  above  controlled  lines  and  other 
smaller  connecting  companies,  the  New  York,  New 
Haven  &  Hartford  has  trackage  rights,  terminable 
at  one  year's  notice,  over  the  Boston  &  Albany,  a 
leased  line  of  the  New  York  Central  System.  It 
also  controls,  jointly  with  the  New  York  Central, 
the  Rutland  Railroad  (468  miles)  traversing  Ver- 
mont and  Northeastern  New  York. 

II.  The  Eastern  Trunk  Line  Systems.  These  lines 
form  the  rail  connections  between  the  Eastern  sea- 
board ports  and  the  Western  traffic  centers,  St. 
Louis  and  Chicago.  Their  long  haul  business  is  very 
competitive.  The  large  traffic  handled,  however, 
gives  them  a  high  average  earning  power.     More- 

*  Controlled  through  majority  stock  control  of  the  Boston  Holding 
Company. 


60        AMERICAN  RAILROAD  ECONOMICS 

over,  because  of  heavy  business,  their  Hues  from  an 
engineering  standpoint,  are  required  to  be  of  the 
most  modern  and  expensive  kind.  The  large  in- 
dustrial and  densely  populated  sections  traversed 
have  fostered  the  development  of  numerous  branches. 
These  are  traffic  "feeders,"  augmenting  both  the 
long  and  the  short  haul  business. 

The  Pennsylvania  System,  The  growth  of  the 
Pennsylvania  System  began  about  1850.  A  quarter 
of  century  later  when  lines  had  been  extended  beyond 
the  Alleghenies  its  mileage  was  approximately  4,000 
miles.  The  Pennsylvania  System  lines  now  extend 
from  New  York,  Philadelphia  and  Baltimore,  in 
the  East,  to  Buffalo  and  the  Lake  Erie  ports  in  the 
North,  and  to  Cincinnati,  St.  Louis  and  Chicago  in 
the  West.  Numerous  branches  and  feeders  connect 
with  almost  all  intermediate  centers  of  industry 
in  this  region.  The  total  mileage  of  the  system  on 
January  1,  1912,  is  represented  as  follows: 

Pennsylvania  Railroad  System 


East  of  Pittsburgh  &  Erie    Miles 

Owned  in  fee 2,128 

Operated  by  Lease  or 

Contract 1,749 

Trackage 234 

Operated  by  Separate 

Organizations 2,219 

Total 6,330 


West  of  Pittsburgh  &  Erie    Miles 

Pennsylvania  Co.  Lines 1,680 

Pittsburgh,  Cincinnati, 

Chicago  &  St.  Louis 1,418 

Other  Controlled  Companies  .2,079 


Total 5,177 


Grand  Total,  January  1,  1912,  11,504  miles. 

In  addition  to  the  foregoing,  the  Pennsylvania 
Railroad  Company  owns  a  substantial  interest  in 


RAILROAD  SYSTEMS  OF  THE  U.  S.         61 

the  Norfolk  &  Western  (2,004  mile§)  operating  from 
Norfolk,  Va.,  to  Cincinnati,  0.,  and  traversing  an 
important  section  of  the  West  Virginia  bituminous 
coal  fields. 

New  York  Central  System.  The  nucleus  of  the  New 
York  Central  Lines  was  the  consolidation,  in  1853, 
of  some  sixteen  independent  connecting  companies 
forming  a  continuous  route  between  Albany  and 
Buffalo.  Branch  lines  were  subsequently  built  or 
acquired.  The  desire  to  control  the  through  traffic 
over  its  lines  to  and  from  the  West  led  to  the  de- 
velopment of  the  New  York  Central  System.  The 
tidewater  terminals  are  at  New  York  and  Boston 
and  western  terminals  at  Cincinnati,  St.  Louis  and 
Chicago.  By  means  of  the  Pittsburgh  and  Lake 
Erie,  the  New  York  Central  enters  the  Pittsburgh 
industrial  district.  The  leased  Rome,  Watertown  & 
Ogdensburg  Railroad,  and  the  Rutland  (jointly 
controlled  with  the  New  York,  New  Haven  &  Hart- 
ford), affords  connection  with  Northern  New  York, 
Vermont  and  the  Canadian  cities.  The  total  mileage 
of  the  system  is  approximately  as  follows : 

New  York  Central  System 

MUes 

New  York  Central  &  Hudson  River  Railroad — owned 809 

—Leased  &  Trackage  2,981 

Total 3.790 

Controlled  Lines  (directly  and  indirectly) 10,266 

Total  January  1,  1912 14.056» 

^  Includes  the  Rutland  and  the  Kanawha  &  Michigan  Railroads  con- 
trolled jointly  with  other  systems. 


62        AMERICAN  RAILROAD  ECONOMICS 

Some  of  the  companies  in  the  New  York  Central 
system  are  not  controlled  directly  by  the  parent 
company  but  indirectly  through  other  subsidiary 
companies.  The  Lake  Shore  &  Michigan  Central 
Railroad,  for  example,  controls  the  Pittsburgh  & 
Lake  Erie  and  also  the  New  York,  Chicago  &  St. 
Louis  Railroad.  It  owns  besides,  the  stock  of  the 
Toledo  &  Ohio  Central  Railroad,  which  furnishes 
connection  with  the  West  Virginia  and  Ohio  coal 
fields.  Jointly  with  the  Baltimore  &  Ohio  Railroad, 
the  Lake  Shore  &  Michigan  Southern  owns  nearly 
one-half  of  the  stock  of  the  Reading  Company  but 
this  mileage  is  not  included  in  the  New  York  Central 
System. 

The  Erie  Railroad  possesses  the  shortest  route 
between  New  York  and  Chicago.  Unlike  the  New 
York  Central  and  Pennsylvania  systems,  however, 
it  does  not  reach  directly  the  largest  intermediate 
centers  of  population  and  industry.  Its  local  traffic, 
therefore,  is  proportionally  less  important.  Orig- 
inally constructed  to  connect  tidewater  with  Lake 
Erie,  the  main  line  has  been  extended  direct  to 
Chicago  with  branches  to  Cleveland  and  Cincinnati. 
A  branch  diverging  from  the  main  line  at  Laka waxen, 
N.  Y.,  runs  south  westwardly  to  Scran  ton,  Pa.,  and 
a  subsidiary  railroad,  the  New  York,  Susquehanna  & 
Western,  has  a  line  direct  from  New  York  to  Wilkes- 
Barre,  Pa.  These  lines  furnish  the  Erie  with  its 
large  coal  traffic.  The  Erie's  system  mileage  on 
June  30,  1913,  (including  the  New  York,  Susque- 
hanna &  Western)  was  2,680  miles  of  road. 


RAILROAD  SYSTEMS  OF  THE  U.  S.         63 

The  Baltimore  &  Ohio  differs  froiji  its  rival  trunk 
line  systems  in  that  its  chief  tide-water  terminal  is 
Baltimore  and  not  New  York  City.  By  using  the 
tracks  of  the  Philadelphia  &  Reading  and  the  Cen- 
tral Railroad  of  New  Jersey,  however,  it  runs  trains 
from  its  own  tracks  into  Philadelphia  and  New 
York.  The  Baltimore  &  Ohio's  main  line  runs  west 
to  Pittsburgh  and  thence  to  Chicago,  with  branches 
along  the  route  tapping  the  Lake  Erie  ports.  An- 
other main  division  runs  directly  west  from  Cumber- 
land, Md.,  passing  over  the  lines  of  the  Baltimore  & 
Ohio  Southwestern,  through  Cincinnati  to  St.  Louis. 
This  is  the  originally  proposed  route  across  the 
Allegheny  Mountains  to  the  Ohio  Valley.  Pitts- 
burgh has  a  direct  connection  with  the  Baltimore  & 
Ohio's  Cincinnati  division  through  a  branch  running 
westerly  and  intersecting  Columbus,  Ohio.  There 
are  also  branches  and  feeders  reaching  into  the 
bituminous  coal  i&elds  and  the  industrial  regions  of 
West  Virginia  and  Ohio.  In  August,  1909,  the  Bal- 
timore &  Ohio  acquired  virtual  control  of  the  Cin- 
cinnati, Hamilton  and  Dayton  Railroad,  which  is 
now  a  part  of  its  system.  With  this  addition  the 
aggregate  system  mileage  exceeds  5,500  miles  (not 
including  the  Reading  mileage). 

The  Chesapeake  &  Ohio  has  only  recently  become 
a  trunk  line.  It  is  more  familiarly  known  as  a  "soft 
coaler"  running  from  Portsmouth,  Va.,  through  a 
route  intersecting  the  Alleghenies  in  the  West  Vir- 
ginia and  Ohio  coal  fields,  and  passing  westward  to 
Cincinnati.   In  1910  it  acquired  a  Chicago  connection 


64        AMERICAN  RAILROAD  ECONOMICS 

through  purchase  of  the  Chicago,  Cincinnati  &  Louis- 
ville Railroad  (renamed  the  Chesapeake  &  Ohio 
Railroad  of  Indiana) .  It  also  has  an  outlet  to  Lake 
Erie  through  control  of  the  Hocking  Valley  Railroad 
and  the  Kanawha  &  Michigan  (the  latter  controlled 
jointly  with  the  New  York  Central) .  Its  total  system 
mileage  is  about  2,600  miles. 

III.  Anthracite  Systems.  The  anthracite  roads 
radiate  in  all  directions  from  the  anthracite  coal 
fields  in  Eastern  Pennsylvania.  The  Reading  System 
(comprising  the  Philadelphia  &  Reading  and  the 
Central  of  New  Jersey  Railroads)  runs  easterly  to 
Philadelphia  and  New  York.  The  Lehigh  Valley 
and  the  Delaware,  Lackawanna  &  Western  Systems 
each  have  terminals  at  New  York  and  at  Buffalo. 
The  New  York,  Ontario  &  Western  has  terminals 
at  New  York  and  at  Oswego  on  Lake  Ontario.  The 
only  one  of  these  systems  that  has  no  direct  connec- 
tion with  New  York  City  is  the  Delaware  &  Hudson 
Company  (the  pioneer  anthracite  railroad),  the 
lines  of  which  run  from  the  coal  fields  in  a  north- 
easterly direction  through  Albany  to  the  Canadian 
boundary.  Here  junction  is  had  with  Canadian 
lines.  The  anthracite  roads  without  exception  are 
interested,  through  direct  or  indirect  ownership,  in 
anthracite  coal  mines.  These  properties  are  im- 
portant assets  to  their  transportation  lines. 

IV.  Southern  Systems.  The  Southern  systems 
have  their  principal  lines  in  the  South  Atlantic  states 
east  of  the  Allegheny  Mountains.  They  accordingly 
traverse  a  region  largely  devoted   to  agriculture. 


RAILROAD  SYSTEMS  OF  THE  U.  S.         65 

The  main  routes,  as  a  rule,  run  north  and  south, 
though  each  system  has  important  intersecting  lines 
connecting  the  Atlantic  coast  and  the  terminal  points 
of  the  Mississippi  Valley.  The  large  railroad  systems 
of  the  South  similar  to  the  Eastern  trunk  lines  have 
been  built  up  through  the  consolidation  and  pur- 
chase of  connecting  short  lines. 

The  Southern  Railway  as  a  type  of  a  railroad  sys- 
tem is  in  some  respects  peculiar.  It  is  not  the  result 
of  direct  extensions  for  the  purpose  of  obtaining  a 
through  route  between  two  large  distributing  points. 
By  consolidating  and  acquiring  numerous  small  and 
intersecting  railroads,  the  Southern  has  come  to 
consist  of  a  network  of  lines  scattered  through  the 
Southern  states  from  the  Atlantic  seaboard  to  the 
Mississippi  River.  A  main  line,  however,  can  be 
distinguished.  This  has  a  northern  terminus  at 
Washington,  D.  C,  and  extends  all  the  way  to  At- 
lanta, Ga.  Diverging  from  Atlanta  there  is  a  line 
running  southeasterly  to  Brunswick  and  another 
running  southwesterly  through  Birmingham  to  Mo- 
bile, Ala.  An  important  main  division,  forming  a 
route  from  Charleston,  S.  C,  to  Nashville,  Tenn., 
bisects  the  main  artery  of  the  System.  Another 
division  starts  at  Knoxville,  Tenn.,  and  reaches 
westerly  to  the  Mississippi  River  at  Memphis.  In 
addition  to  its  own  corporate  lines,  the  Southern 
Railway  System  has  been  extended  through  control 
of  subsidiaries.  It  is  part  owner  of  the  Queen  & 
Crescent  Route  running  south  from  Cincinnati  through 
Birmingham   to    Meridian    and    Shreveport.     An- 


66        AMERICAN  RAILROAD  ECONOMICS 

other  trunk  line  (the  Mobile  &  Ohio  Railroad)  fur- 
nishes a  direct  route  between  Mobile,  Ala.,  and  St. 
Louis.  From  St.  Louis,  the  "Monon"  (controlled 
jointly  with  the  Louisville  &  Nashville  System) 
continues  the  line  to  Chicago.  The  following  is  a 
summary  of  the  Southern  Railway  System  mileage, 
June  30,  1912:  ^ 

Southern  Railway  System 

Miles 

Owned  in  fee 4,289 

Leased  and  Trackage  rights 2,325 

Controlled  by  Stock  Ownership 475 

Total  Operated  Directly 7,089 

Controlled  Companies — Operated  separately 

Mobile  &  Ohio .926 

Other  Companies 733 

1,659 

Affiliated  Companies 

Alabama  Great  Southern 357 

Cincinnati,  New  Orleans  &  Texas  Pacific 336 

Georgia  Southern  &  Florida 397 

Other  Companies 117 

1,207 

Grand  Total 9,955 

The  Atlantic  Coast  Line's  main  stem  and  branches 
are  mostly  east  of  the  Southern  Railway  lines.  The 
terminal  divisions  from  Richmond  and  from  Nor- 
folk, Va.,  converge  at  Rocky  Mount,  Va.,  thus  form- 
ing a  main  line  running  south  to  Charleston,  S.  C, 
and  thence  to  Savannah,  Ga.  and  to  Jacksonville 
and  Tampa,  Fla.  From  Savannah  there  is  a  division 
which  forms  junctions  with  the  Louisville  &  Nash- 


RAILROAD  SYSTEMS  OF  THE  U.  S.         67 


ville — (a  controlled  but  independently  operated  rail- 
road system) — at  Chattahoochee,  Fla.,  and  Mont- 
gomery, Ala.  The  branches  and  "feeders"  along 
the  main  stem  of  the  Atlantic  Coast  Line  are  generally 
short  and  do  not  reach  beyond  the  tidewat^  region. 
This  contrasts  with  the  mountainous  character  of 
Southern  Railway's  territory.  Exclusive  of  the 
Louisville  &  Nashville's  lines  (described  separately 
on  page  69)  the  Atlantic  Coast  Line's  system  road 
mileage  on  June  30,  1913,  was  approximately,  5,000 
miles. 

The  Seaboard  Air  Line  covers  almost  the  identical 
territory  of  the  Atlantic  Coast  Line.  Its  main  stem, 
also  extends  from  Richmond  and  from  Norfolk,  Va., 
to  Tampa,  Fla.  An  important  division  running 
west  from  Wilmington,  N.  C,  bisects  the  main  line 
and  passes  beyond,  through  Atlanta,  to  Birming- 
ham, Ala.  Another  division  extends  from  the  main 
line  at  Savannah  to  Montgomery,  Ala.  The  Sea- 
board has  less  branch  mileage  than  the  Atlantic 
Coast  Line  or  the  Southern  Railway.  Its  physical 
and  traffic  characteristics  are  therefore  not  entirely 
similar.  The  system  mileage  on  June  30,  1913,  ex- 
ceeded 3,000  miles.  In  addition  to  its  rail  lines, 
the  Seaboard  Air  Line  controls  the  Baltimore  Steam 
Packet  Co.,  plying  between  Norfolk  &  Baltimore. 
It  also  has  a  substantial  interest  in  the  Old  Dominion 
Steamship  Company,  plying  between  Norfolk  and 
New  York. 

V.  Mississippi  Valley  Systems  like  the  Southern 
seaboard   systems   have   their   main   lines   running 


68        AMERICAN  RAILROAD  ECONOMICS 

north  and  south  with  important  branches  passing 
east  and  west.  The  chief  purpose  of  these  systems 
is  to  connect  the  large  centers  of  population  along 
the  Great  Lakes  with  the  Gulf  ports.  In  view  of 
the  alluvial  nature  of  the  territory  traversed,  railroad 
transportation  in  the  Mississippi  Valley  is  subject 
to  different  operating  conditions  than  prevail  among 
the  systems  east  of  the  Alleghenies  or  in  the  Rocky 
Mountain  and  Pacific  regions. 

The  Illinois  Central  is  the  oldest  of  the  Mississippi 
Valley  systems.  Its  main  artery  is  a  direct  route 
between  Chicago  and  New  Orleans.  An  important 
division  that  runs  from  Chicago  directly  west  to 
Sioux  City  (where  there  is  connection  with  the 
Union  Pacific)  is  outside  of  the  territory  of  the  main 
lines.  Numerous  branches  and  intersecting  lines 
bring  the  system  into  communication  with  the  im- 
portant intermediate  centers  of  traffic,  notably 
Springfield,  111.,  Indianapolis,  St.  Louis,  Louisville, 
Memphis,  Birmingham  and  Vicksburg.  The  con- 
trol of  the  Central  of  Georgia  Railroad  acquired  in 
1910  gives  a  connection  (from  Birmingham,  Ala.) 
with  the  Atlantic  tidewater  at  Savannah,  Ga.  The 
lower  Mississippi  River  points  from  Memphis  to 
New  Orleans  are  reached  by  the  Yazoo  &  Mississippi 
Valley  Railroad,  a  separately  operated  but  integral 
part  of  the  Illinois  Central  System.  The  approxi- 
mate mileage  of  the  companies  owned  and  controlled 
are  substantially  as  follows: 


RAILROAD  SYSTEMS  OF  THE  U.  S.  69 

Miles 

'iilinois  Central  R.  R.  Co .' 4,755.25 

Louisville  &  Wadley  R.  R.  Co 10.00 

Wadley  Southern  Ry.  Co 90.00 

Wrightsville  &  Tennille  R.  R.  Co 105. 17 

Yazoo  &  Mississippi  Valley  R.  R.  Co 1.371 .98 

Central  of  Georgia  Ry.  Co 1,915.42 

Total 8,247.82 

The  Louisville  &  Nashville  System  is  under  the 
administrative  control  of  the  Atlantic  Coast  line, 
the  owner  of  51  per  cent,  of  its  capital  stock.  It  is, 
however,  an  independent  system  in  itself.  The  main 
stem  of  the  Louisville  &  Nashville  extends  from  Cin- 
cinnati, O.,  to  Pensacola  (Fla.),  on  the  GuK  of  Mexico. 
Its  main  mileage,  therefore,  is  east  of  the  Illinois 
Central  lines.  Two  divisions  in  the  northern  part 
of  the  System  connect  the  two  important  centers, 
St.  Louis  and  Memphis,  and  a  branch  near  the  south- 
ern terminus  brings  the  lines  into  direct  connection 
with  New  Orleans.  These  are  important  arteries 
for  supplying  traffic.  Another  division,  separate 
from  the  main  stem,  runs  directly  south  from  the 
Cincinnati  terminus  to  Atlanta,  Ga.,  passing  through 
a  large  coal  mining  district.  Here  it  connects  with 
the  leased  Georgia  Railroad  and  Banking  Company 
lines  which  furnish  connection  with  Augusta  and 
other  Georgia  junction  points.  On  June  30,  1912, 
the  system  was  constituted  as  follows:  „.^^ 

Lines  owned  entirely 4,071 

Leased  Lines 669 

Total  directly  operated 4,740 

Lines  controlled  or  operated  separately 3,208 

Total  System 7,948 


70        AMERICAN  RAILROAD  ECONOMICS 

The  lines  of  the  *S^.  Louis  <Sc  Sa7i  Francisco  Sys- 
tem for  the  most  part  he  at  considerable  distance 
from  the  Mississippi  River.  An  important  eastern 
artery,  however,  furnishes  a  route  from  Chicago  to 
New  Orleans.  Entrance  to  New  Orleans  was  ac- 
quired in  1911  through  a  joint  control  (with  the 
Louisville  &  Nashville)  of  the  New  Orleans,  Mobile 
&  Chicago  Railroad.  Although  the  'Frisco's  cor- 
porate lines  have  their  northern  terminal  points  at 
Kansas  City  and  St.  Louis,  the  ownership  of  the 
Chicago  &  Eastern  Illinois  Railroad  furnishes  a  route 
north  to  Chicago.  Thus,  the  St.  Louis  &  San  Fran- 
cisco system  has  lines  connecting  Chicago  and  the 
Gulf  points.  These  lines,  however,  have  not  the 
directness  of  the  other  Mississippi  Valley  systems. 
Because  of  its  numerous  intersecting  and  zig-zag 
branches  the  main  arteries  of  the  'Frisco  System  are 
difficult  to  distinguish.  This  is  a  disadvantage  in 
the  competition  for  through  traffic.  The  'Frisco, 
in  1910,  acquired  a  substantial  hold  on  the  traffic 
moving  along  the  Gulf  Coast  by  purchasing  the 
St.  Louis,  Brownsville  &  Mexico  Railroad  (line  from 
Brownsville  at  the  mouth  of  the  Rio  Grande  River 
to  Galveston)  and  combining  it  with  the  New  Or- 
leans, Texas  &  Mexico  Railroad,  connecting  Gal- 
veston with  New  Orleans.  The  following  are  the 
principal  constituent  companies  of  the  'Frisco  Sys- 
tem: 


RAILROAD  SYSTEMS  OF  THE  U.  S.         71 

St.  Louis  &  San  Francisco  System 

Mileage 

St.  Louis  &  San  Francisco  R.  R.  Co 4,731 .88 

Chicago  &  Eastern  Illinois  R.  R.  Co 1.275.38 

Fort  Worth  &  Rio  Grande  Ry.  Co 235.22 

New  Orleans,  Texas  &  Mexico  R.  R.  Co 264.48 

St.  Louis,  Brownsville  &  Mexico  Ry.  Co 509.85 

St.  Louis.  San  Francisco  &  Texas  Ry.  Co 243.33 

Other  Lines 265.53 

Total 7,524.67 

The  Missouri,  Kansas  &  Texas,  and  the  Kansas 
City  Southern  cover  nearly  identical  territory.  The 
main  stem  of  each  runs  from  Kansas  City  to  the 
Gulf.  The  Missouri,  Kansas  &  Texas  has  its  south- 
ern terminus  at  Galveston,  and  the  Kansas  City 
Southern  at  Port  Arthur.  The  unique  feature  of  the 
Kansas  City  Southern  is  that  it  has  no  branch  mile- 
age other  than  two  spurs;  one  connecting  with  Ft. 
Smith,  Ark.,  and  the  other  running  from  De  Quincy 
to  Lake  Charles,  La.  These  together  represent  but 
40  miles  of  a  total  system  of  834  miles.  Unlike  its 
rival  system,  the  "Katy,"  as  the  Missouri,  Kansas 
&  Texas  is  familiarly  known,  has  a  fairly  large  pro- 
portion of  branch  mileage.  This  gives  it  an  advan- 
tage in  reaching  a  greater  number  of  traflSc  centers. 
Thus,  as  northern  terminals,  in  addition  to  Kansas 
City,  it  has  Alton,  111.,  St.  Louis,  Hannibal,  Mo., 
and  Junction  City,  Kansas.  Branches  and  divisions 
supplementary  to  the  main  line  reach  important 
intermediate  towns  in  Oklahoma,  in  Louisiana  and 
in  Texas.  In  all,  the  "Katy"  system  comprises  in 
the  neighborhood  of  4,000  miles. 


72        AMERICAN  RAILROAD  ECONOMICS 

VI.  Middle  Western  Systems  in  the  North.  The 
independent  lines  operating  in  the  geographical 
division  bordering  along  the  Great  Lakes  west  of 
Buffalo  and  east  of  Chicago  and  St.  Louis  are  a 
relatively  unimportant  group.  Most  of  the  lines 
in  this  territory  are  subsidiaries  of  the  Eastern 
Trunk  Lines  or  other  leading  railroad  systems. 
Even  the  Wabash  Railroad  System,  which  has  its 
main  divisions  in  this  region,  was  intended  as  an 
eastern  extension  of  the  *  Missouri  Pacific  System. 
The  receivership  of  the  Wabash  Railroad  and  of  its 
Pittsburgh  connections,  (the  Wheeling  &  Lake  Erie 
and  the  Wabash  Pittsburgh  Terminal  Company), 
establishes  its  independence  as  a  railroad  organiza- 
tion. The  western  terminals  of  the  Wabash  are  at 
Council  Bluffs,  Omaha  and  Kansas  City,  and  the 
eastern  terminals  are  Detroit,  Buffalo  and  Pitts- 
burgh. It  is  very  probable  that  in  a  reorganization, 
the  Pittsburgh  connections  will  be  lost.  Buffalo  is 
reached  from  Detroit  over  the  tracks  of  the  Grand 
Trunk  Railway  in  Canada.  An  important  division 
of  the  Wabash  is  the  Chicago-Toledo  Line,  one  of 
the  shortest  routes  from  Chicago  to  Toledo.  The 
total  mileage  of  the  Wabash  System  (exclusive  of  its 
Pittsburgh  subsidiaries)  is  approximately,  2,500 
miles. 

The  Toledo,  St  Louis  Sc  Western  System  comprises 
the  Toledo,  St.  Louis  &  Western  Railroad  and  the 
Chicago  &  Alton  Railroad,  The  latter  was  acquired 
in  1907  through  purchase  of  a  majority  of  capital 
stock.    St.  Louis  is  the  only  point  of  convergence  of 


RAILROAD  SYSTEMS  OF  THE  U.  S.  73 

the  lines  of  the  two  companies.  A  main  stem  of  the 
Chicago  &  Alton  is  a  direct  route  north  into  Chicago 
and  another  runs  westerly  into  Kansas  City.  The 
Toledo,  St.  Louis  &  Western  furnishes  a  short  north- 
east route  from  St.  Louis  to  Toledo  and  Detroit. 
Together,  the  lines  of  the  two  companies  comprise 
approximately  1,500  miles. 

VII.  The  Northwestern  Trunk  Line  Systems. 
These  systems  include  the  principal  railroads  operat- 
ing throughout  the  region  west  and  northwest  of  Chi- 
cago. Not  all  have  direct  entrance  to  Chicago.  The 
Union  Pacific,  one  of  the  important  systems  in  the 
group,  has  its  eastern  termini  at  Omaha  and  Kansas 
City.  By  means  of  junctions  and  traffic  interchange 
arrangements  with  other  systems  it  suffers  no  great 
loss  of  through  business.^  The  Great  Northern  and 
Northern  Pacific  likewise  do  not  enter  Chicago. 
Both,  however,  are  assured  favorable  traffic  inter- 
change conditions  with  the  western  metropolis 
through  their  joint  control  of  the  Chicago,  Burling- 
ton &  Quincy  Railroad,  which,  aside  from  its  numer- 
ous branches  and  feeders,  has  a  direct  line  into 
Chicago. 

Several  of  the  important  systems  which  originate 
in  Chicago  and  reach  out  toward  the  West,  do  not  as 
yet  possess  Pacific  terminals.  Important  among 
these  are  the  Chicago  &  North  Western  and  the 
Burlington; but  the  "  Burlington  "  has  connection  with 

1  The  late  E.  H.  Hamman,  referring  to  the  Union  Pacific's  isolated 
location  at  the  time  he  became  its  active  administrator,  described  it  as 
a  railroad  "beginning  nowhere  and  ending  nowhere." 


74        AMERICAN  RAILROAD  ECONOMICS 

the  Hill  lines,  and  the  "Northwestern"  exchanges 
Coast  traffic  with  the  Union  Pacific. 

The  varying  topographical  characteristics  and 
the  sparsity  of  population  west  of  Chicago  causes 
the  northwestern  systems  to  differ  from  the  eastern 
trunk  lines  in  both  physical  and  traffic  features. 
The  length  of  their  mileage  in  relation  to  the  business 
done  is  much  greater,  and  commodities  are  hauled 
longer  distances.  The  agricultural  character  of  the 
territory  served  requires  numerous  branches  of 
light  traffic.  The  physical  facilities  and  traffic 
conditions,  therefore,  are  not  comparable  with  rail- 
roads traversing  densely  populated  sections. 

The  Union  Pacific  System,  as  already  mentioned 
on  page  73,  has  no  line  into  Chicago.  From  each 
of  its  eastern  termini,  Kansas  City  and  Omaha,  a 
line  runs  parallel  directly  west.  The  line  from  Kansas 
City  is  a  short  route  to  Denver,  Colo.  The  line  from 
Omaha  is  the  shortest  route  to  Ogden,  Utah,  and 
constitutes  the  main  stem  of  the  system.  It  is  con- 
nected with  the  Denver  division  by  a  branch  running 
north  from  the  city  of  Denver.  Three  arteries 
extend  from  Ogden  to  the  Coast.  One,  running 
northwesterly  via  Oregon  Short  Line,  reaches  the 
ports  of  Puget  Sound.  The  central  artery  (the  Cen- 
tral Pacific,  a  subsidiary  of  the  Southern  Pacific) 
runs  through  the  Sierra  Mountains  direct  to  San 
Francisco.  The  third  line  (the  San  Pedro,  Los 
Angeles  &  Salt  Lake  Railroad)  is  a  short  route  to 
Los  Angeles  and  Southern  California.  The  strategic 
value  of  these  arteries,  from  a  business  standpoint,  is 


RAILROAD  SYSTEMS  OF  THE  U.  S.         75 

of  the  highest  importance  to  the  Union  Pacific. 
Their  possession  gives  the  system  participation  in 
the  long  haul  traffic  to  and  from  the  Pacific  Coast. 
The  branches  of  the  Southern  Pacific  Company  (un- 
til recently  controlled  by  stock  ownership),  through 
junction  with  the  Union  Pacific  lines,  afford  a  means 
for  collecting  and  distributing  this  traffic.  Several 
minor  divisions  of  the  Union  Pacific  bring  the  system 
into  direct  communication  with  leading  intermediate 
business  centers  such  as  Butte,  Mont.,  and  Spokane, 
Wash.  There  are  also  a  number  of  small  "feeders" 
in  the  grain  growing  region.  These  together  with 
the  main  lines  and  the  proprietary  mileage,  aggre- 
gated on  June  30,  1912,  approximately  7,500  miles  of 
road. 

The  Great  Northern  and  Northern  Pacific  systems 
although  under  one  personal  administrative  control 
are  operated  entirely  independently.  They  are  in 
many  respects  parallel  and  competing  lines  covering 
almost  identical  territory.  Their  eastern  termini 
are  at  Duluth,  Wis.,  and  St.  Paul,  Minn.,  and  the 
Western  termini  at  points  along  Puget  Sound.  The 
Northern  Pacific  lines,  however,  run  mainly  di- 
rectly west,  whereas,  the  Great  Northern's  principal 
lines  run  northwesterly  along  the  Canadian  border. 
The  Northern  Pacific,  however,  has  a  branch  directly 
north  from  Winnipeg  Junction,  Minn.,  to  Winnipeg, 
Canada.  Thus,  both  systems  participate  in  the 
grain  movement  from  the  Canadian  wheat  fields 
to  Chicago.  The  branch  lines  and  "feeders"  of  the 
Great  Northern  lie  mainly  in  the  wheat  growing 


76        AMERICAN  RAILROAD  ECONOMICS 

section  of  North  Dakota  and  in  the  iron  ore  lands  of 
Minnesota.  The  movement  of  these  commodities  is 
an  important  element  in  this  company's  traffic. 
Both  systems  have  developed  branch  lines  in  the 
State  of  Washington.  By  means  of  the  jointly 
controlled  Spokane,  Portland  and  Seattle  Railway 
connection  is  afforded  with  a  newly  developed  coun- 
try rich  in  agricultural  and  commercial  possibilities. 
Exclusive  of  this  subsidiary  (of  approximately  600 
miles)  the  mileage  of  the  Great  Northern  on  June  30, 
1912,  was  about  7,400  miles  and  that  of  the  Northern 
Pacific  6,700  miles. 

The  Chicago  &  North  Western  System  is  the  prod- 
uct of  more  than  fifty  years  of  continuous  develop- 
ment. Its  net  work  of  lines  unites  Chicago  with  all 
the  important  traffic  centers  in  the  states  of  Wiscon- 
sin, Minnesota,  South  Dakota  and  Nebraska.  With 
its  main  subsidiary,  the  Chicago,  St.  Paul,  Minneap- 
olis &  Omaha  Railroad,  (the  "Omaha")  it  comprises 
in  all  approximately  9,000  miles  of  which  only  a 
very  small  portion  represents  leased  lines  or  trackage 
rights. 

The  Chicago,  Milwaukee  &  St.  Paul  System, 
familiarly  known  as  the  St.  Paul,  covers  practically 
the  same  territory  as  the  "Northwestern."  Many 
of  their  lines  are  parallel  and  competing.  The  St. 
Paul,  besides  having  a  line  to  Kansas  City  not 
duplicated  by  its  rival,  completed  in  1911  a  Pacific 
Coast  extension,  the  Chicago,  Milwaukee  &  Puget 
Sound  Railroad.  This  extension,  built  to  preserve 
St.    Paul's    "through"    business    from    competing 


RAILROAD  SYSTEMS  OF  THE  U.  S.         77 

systems,  comprises  1,400  miles  of  road.  The  develop- 
ment of  branch  lines  and  "feeders"  will  undoubtedly 
add  to  the  mileage.  With  the  Coast  extension,  the 
"St.  Paul"  aggregates  approximately  9,000  miles  of 
road.     All  but  a  very  small  part  is  owned  in  fee. 

The  Minneapolis,  St,  Paul  &  Sault  Ste.  Marie 
System,  (the  "Soo"),  constitutes  the  main  mileage  of 
the  Canadian  Pacific  lines  in  the  United  States.  By 
means  of  the  "Soo,"  the  Canadian  Pacific  partici- 
pates in  the  through  traffic  between  Chicago  and 
Vancouver,  its  main  Pacific  Coast  terminal.  The 
Canadian  Pacific,  therefore,  is  an  active  competitor 
of  the  Northwestern  Trunk  Lines  in  the  United 
States.  The  "Soo"  System,  beginning  at  Chicago 
(with  the  main  line  of  the  Wisconsin  Central)  con- 
nects with  the  Canadian  Pacific  at  Duluth  and  along 
the  international  boundary  line  of  North  Dakota. 
Duluth  is  reached  through  affiliation  with  the  Duluth, 
South  Shore  &  Atlantic  Railroad.  Although  passing 
through  a  large  grain  section  the  "Soo"  is  not  as 
well  provided  with  branches  and  "feeders"  as  its 
rival  systems.  Its  aggregate  mileage,  therefore,  is 
considerably  less. 

The  Chicago,  Burlington  &  Quincy  System,  "the 
Burlington",  like  the  "Northwestern"  and  the 
"St.  Paul,"  has  its  base  stem  in  Chicago,  with  main 
lines  running  directly  west  and  with  numerous  inter- 
secting branches  and  "feeders."  The  principal 
western  termini  are  Denver,  Colo.,  Cheyenne  and 
Billings,  Mont.  From  Denver  and  Cheyenne,  junc- 
tions  are  formed   with   the   Colorado   &   Southern 


78        AMERICAN  RAILROAD  ECONOMICS 

(controlled  through  stock  ownership).  This  sub- 
sidiary affords  the  Burlington  a  Gulf  outlet.  At 
Billings  and  also  at  Fromberg,  Mont.,  traflfic  is 
interchanged  with  the  Great  Northern  and  Northern 
Pacific  Systems.  Because  of  its  extensive  main  lines 
and  its  many  branches  and  "feeders,"  the  Burlington 
System  (including  the  Colorado  &  Southern  lines) 
comprises  in  all  about  11,800  miles  of  road.  This  is 
the  largest  mileage  of  any  of  the  western  trunk  line 
systems. 

VIII.  The  Southwestern  Systems.  The  expansion 
of  the  southwestern  trunk  lines  has  the  same  goal 
as  the  northwestern  systems.  The  aim  is  a  through, 
unbroken  track  between  Chicago  and  the  Pacific 
Coast.  A  secondary  objective  point  is  the  Mexican 
GuK  ports.  These  systems,  accordingly,  compete 
partially  for  "through"  business  with  the  north- 
western as  well  as  with  the  Mississippi  Valley  sys- 
tems. Like  the  northwestern  lines,  the  mileage  of 
the  southwestern  group  is  quite  extensive.  The 
region  traversed  is  vast  and,  for  the  most  part, 
thinly  populated.  The  companies  with  lines  passing 
over  the  Rockies  have  difficult  grades  to  contend 
with.  All  these  factors  influence  the  physical  and 
traffic  characteristics  of  the  southwestern  railroads, 
marking  them  apart  from  railroads  in  other  geo- 
graphical divisions. 

The  Southern  Pacific  System  has  one  great  point 
of  difference  from  the  other  systems  in  the  "South- 
western group."  The  direction  of  its  longest  trans- 
continental line  has  no  relationship  with  tlie  traffic 


RAILROAD  SYSTEMS  OF  THE  U.  S.         79 

between  Chicago  and  the  Pacific  or  the  Gulf.  Its 
Central  Pacific  line,  extending  from  San  Francisco 
to  Ogden,  Utah,  is  more  properly  an  integral  part 
of  the  Union  Pacific  System,  and  constituted  the 
latter 's  most  important  asset  in  its  former  control 
of  the  Southern  Pacific  Company. 

The  main  artery  of  the  Southern  Pacific  extends 
from  the  mouth  of  the  Mississippi  River  (where 
trafiSc  is  exchanged  with  controlled  steamship  sys- 
tems plying  between  New  York  and  the  Gulf) 
through  Louisiana  and  lower  Texas,  and  along  the 
Mexican  border  to  Los  Angeles,  San  Francisco  and 
as  far  north  as  Portland,  Ore.  Here  a  junction  is 
formed  with  the  Union  Pacific  lines.  The  branch 
lines  and  "feeders"  of  the  Southern  Pacific  are 
mostly  in  eastern  Texas  and  in  central  California. 
Mexican  connections  are  being  developed  by  the 
construction  of  a  line  from  the  main  stem  in  Arizona 
along  the  western  coast  of  Mexico.  The  aggregate 
mileage  of  the  Southern  Pacific  System  (including 
the  Central  Pacific)  on  June  30,  1912,  was  11,600 
miles. 

The  Atchison,  Topeka  &  Santa  Fe  is  the  only  rail- 
road which  has  a  direct  route  over  its  corporate  lines 
from  Chicago  to  San  Francisco.  Its  base  stem  from 
Chicago  runs  southwesterly  through  Kansas,  Okla- 
homa and  the  Panhandle  of  Texas.  Thence,  parallel- 
ing the  Southern  Pacific's  main  line,  it  passes  through 
New  Mexico,  Arizona,  and  Central  California.  A 
branch  running  north  reaches  Denver,  and  two 
others  from  the  main  line  converge  at  Galveston. 


80        AMERICAN  RAILROAD  ECONOMICS 

The  Atchison,  therefore,  competes  with  the  Southern 
Pacific  for  through  business  exchanged  between 
California  and  the  Gulf  of  Mexico.  A  net  work  of 
small  branch  lines  and  "feeders"  is  confined  prin- 
cipally to  the  grain  growing  section  of  Kansas  and 
Oklahoma.  The  Atchison  lines  as  a  whole  comprise 
about  10,500  miles  of  road. 

The  Missouri  Pacific  System,  including  the  Den- 
ver &  Rio  Grande  lines,  though  lately  having  com- 
pleted a  Pacific  Coast  connection,  has  no  extension 
into  Chicago  unless  the  Wabash  is  still  to  be  con- 
sidered an  integral  part  of  its  lines.  St.  Louis,  Mo., 
is  the  base  stem  from  which  the  Missouri  Pacific 
lines  originate  and  spread  out  over  the  important 
traffic  centers  of  the  Great  West.  The  most  north- 
erly point  reached  is  Omaha  through  a  branch 
running  from  Kansas  City.  New  Orleans,  Galves- 
ton, Laredo  and  El  Paso  on  the  Mexican  border 
are  southern  termini,  but  none  of  these  points  are 
reached  by  "short  cuts."  Thus,  the  Missouri  Pacific 
lines  in  competing  for  the  through  business  from 
St.  Louis  to  the  Gulf  and  Mexican  points  are  at  a  dis- 
advantage as  compared  with  other  lines  having 
more  direct  routes.  The  junction  with  the  Denver 
&  Rio  Grande  System  is  at  Pueblo,  Colorado.  At 
this  point  a  series  of  lines  in  all  directions  covers 
the  central  region  of  the  Rocky  Mountains.  Denver 
lies  more  than  100  miles  north  of  Pueblo  and  is 
therefore  off  the  direct  transcontinental  route  which 
passes  from  Pueblo  over  the  mountains  to  Salt  Lake 
City  and  Ogden,  Utah.     The  eastern  terminus  of 


RAILROAD  SYSTEMS  OF  THE  U.  S.         81 

the  Western  Pacific,  (the  newly  completed  Coast 
extension  of  the  Denver  &  Rio  Grande  Railroad), 
is  at  Salt  Lake  City.  This  line  runs  directly  west  to 
San  Francisco,  paralleling  a  large  part  of  the  Central 
Pacific  Railroad.  Notwithstanding  the  recent  ex- 
tensions and  the  vast  net  work  of  lines  (all  of  which 
give  the  Missouri  Pacific  and  Denver  &  Rio  Grande 
systems  together  more  than  13,000  miles  of  road) 
these  "Gould  Lines"  do  not,  as  yet,  command  a 
traffic  interchange  commensurate  with  their  location 
and  mileage. 

The  Rock  Island  System  in  proportion  to  its  mile- 
age covers  a  wider  territory  than  any  of  the  other 
western  systems.  Its  lines  traverse  almost  all  the 
states  between  the  Mississippi  River  and  the  Rocky 
Mountains.  The  main  stem  rising  at  Chicago,  ex- 
tends directly  west  through  Omaha  to  Denver. 
Diverging  north  from  this  line  are  two  divisions, 
with  intersecting  branches.  One  terminates  at 
Watertown,  S.  D.,  and  the  other  at  St.  Paul.  An- 
other important  division  extends  from  Rock  Island, 
111.,  all  the  way  to  the  Mexican  border  at  El  Paso. 
From  this  line  there  are  two  parallel  branches,  one 
reaching  to  Memphis  and  the  other  to  Kansas  City 
and  St.  Louis.  Thus,  the  Rock  Island  is  well  pro- 
vided with  facilities  for  through  traffic  to  and  from 
Mexico.  It  has  not  yet  developed  sufficient  branches 
to  furnish  a  large  local  business,  especially  in  the 
grain  and  cotton  growing  sections.  Because  of  ex- 
tensive main  lines,  however,  the  Rock  Island  System 
comprises  about  8,000  miles  of  road. 


82        AMERICAN  RAILROAD  ECONOMICS 

TRAFFIC   INTERCHANGE  AGREEMENTS 

The  foregoing  concise  description  of  the  leading 
railroad  systems  in  the  United  States  is  largely  for 
the  purpose  of  pointing  out  the  influence  of  geo- 
graphical location  on  railroad  operations,  and  the 
strategic  advantage  in  competition  acquired  by  the 
railroad  systems  having  favorable  routes  for  through 
business.  An  additional  factor  influencing  operating 
results  are  the  contracts  or  arrangements  for  inter- 
change of  traffic  with  connecting  and  independent 
lines.  The  terms  of  these  agreements,  if  favorable, 
may  afford  to  a  railroad  company  all  the  advantages 
of  system  extension.  In  fact  the  difficulties  in  ob- 
taining favorable  terms  as  against  competing  rail- 
roads frequently  led  to  the  actual  purchase  or  ad- 
ministrative control  of  connecting  lines  forming  a 
complete  "through  traffic"  route.  By  favoring  the 
shipments  of  one  connecting  line  over  those  of  an- 
other or  by  interchanging  freight  exclusively  with 
one  of  several  competing  lines,  a  small  intermediate 
railroad  might  be  used  as  the  means  of  crushing  a 
rival  railroad  system.  An  analogous  situation  was 
the  motive  for  the  St.  Paul's  Pacific  Coast  extension. 
Up  to  1906,  St.  Paul  was  creating  a  large  volume  of 
business  on  its  lines  and  turning  it  over  to  connect- 
ing roads.  Because  competing  systems  employed  the 
Burlington  as  a  Chicago  extension,  and  because  of 
the  traffic  alliance  of  the  Union  Pacific  and  the 
Chicago  &  North  Western,  the  St.  Paul  did  not  re- 
ceive its  proper  share  of  interchanged  tonnage.    Nat- 


RAILROAD  SYSTEMS  OF  THE  U.  S.         83 

urally,  the  St.  Paul  wanted  to  get  as  much  business 
as  possible.  So  the  Pacific  Coast  extension  was 
built  (the  Chicago,  Milwaukee  &  Puget  Sound  Rail- 
road) ;  a  venture  which  cost  more  than  $150,000,000. 

A  good  illustration  of  a  mutually  favorable  traffic 
interchange  agreement  is  that  in  force  between  the 
Kansas  City  Southern,  on  the  one  hand,  and  the 
Union  Pacific  and  Southern  Pacific  lines,  on  the 
other.  This  agreement  was  made  in  January,  1909. 
The  Kansas  City  Southern  is  a  trunk  line  forming  a 
junction  with  the  Union  Pacific  at  Kansas  City 
and  running  directly  south  to  a  junction  with  the 
Southern  Pacific  at  Shreveport,  La.,  and  Beaumont, 
Texas.  It  is  thus  a  natural  link  in  the  Harriman 
lines.  By  the  terms  of  the  traffic  agreement,  the 
Kansas  City  Southern  becomes  a  through  line  for 
the  transportation  of  freight  interchanged  by  the 
parties  between  (1)  points  on  or  west  of  the  Missis- 
sippi River  and  (2)  points  in  what  is  commonly 
known  as  "Seaboard  Territory."  A  substantial  in- 
crease in  Kansas  City  Southern's  business  is  the 
natural  outcome  of  this  arrangement.^ 

A  more  recent  and  noteworthy  traffic  alliance  is 
that  between  the  New  York  Central  Lines  and  the 
Western  Maryland  Railroad  for  the  movement  of 
freight  between  Pittsburgh  and  Baltimore.  This 
agreement  permits  coal  from  the  Pittsburgh  district 
to  be  laid  down  in  Baltimore  and  other  eastern  tide- 
water destinations  in  competition  with  coal  from 

^  This  agreement  may  cease  because  of  the  segregation  of  the  Union 
Pacific  and  Southern  Pacific  systems. 


84        AMERICAN  RAILROAD  ECONOMICS 

Virginia,  West  Virginia,  Kentucky  and  Tennessee 
coal  fields.  This  means  an  influx  of  coal  to  eastern 
tidewater  from  a  new  source.  Unless  a  freight  rate 
war  with  competing  systems  causes  the  new  business 
to  be  carried  at  a  loss,  both  contracting  companies 
will  benefit  through  the  additional  revenue  furnished 
by  the  traffic  interchange. 

Other  instances  of  advantageous  traffic  interchange 
arrangements  could  be  pointed  out.  The  purpose 
here,  however,  is  merely  to  call  attention  to  the  in- 
fluence of  these  alliances  on  railroad  earning  power. 
New  developments  of  this  kind  are  worthy  of  close 
study  and  analysis  by  all  who  are  interested  in  rail- 
road values  or  railroad  operating  results. 


CHAPTER  IV 

ECONOMICS   OF   RAILROAD    CONSTRUCTION 

Railroad  activities  can  be  broadly  divided  into 
construction  and  operation.  The  investor  and  the 
student  of  transportation  are  concerned  equally  with 
both  branches.  Successful  railroad  operation  from  a 
financial  viewpoint  is  largely  dependent  upon  the 
character  and  cost  of  the  physical  construction. 
Therefore,  a  proper  understanding  and  interpreta- 
tion of  operating  statistics  and  accounts  demands 
at  least  an  elementary  knowledge  of  the  underlying 
economic  principles  of  railroad  construction. 

Investment  Basis  of  Railroad  Construction.  From 
a  strictly  business  viewpoint  there  is  but  one  domi- 
nant motive  for  railroad  construction,  viz.,  the  proba- 
bility of  a  profit  on  the  money  thus  invested.  It 
must  be  assumed,  therefore,  throughout  this  work, 
that  a  railroad  project  is  undertaken  primarily  as 
an  investment  to  those  supplying  the  capital.  The 
fact  that  the  greater  part  of  railroad .  construction 
in  the  United  States  has  not  successfully  fulfilled 
this  purpose  for  the  original  security  holders  does  not 
invalidate  this  assumption.  Unlike  industrial  enter- 
prises, American  railroads  have  not  been  built  with 
funds  furnished  exclusively  by  the  promoters.  From 
their  inception,  large  capital  expenditures  required 

85 


86        AMERICAN  RAILROAD  ECONOMICS 

the  financial  participation  of  the  public  as  investors. 
This  renders  all  the  more  important  a  proper  inter- 
pretation of  the  fundamental  principles  of  railroad 
promotion  and  construction.^ 

When  a  project  for  a  new  railroad  is  proposed,  the 
first  problem  considered  by  promoters  is  whether 
the  need  for  the  line  justifies  the  construction  ex- 
pense. The  size  and  character  of  the  places  to  be 
connected  and  the  resources  of  the  sm^rounding 
territory,  considered  in  connection  with  existing 
transportation  facilities,  are  factors  influencing  the 
solution  of  this  problem.  As  pointed  out  by  Mr.  W. 
L.  Webb,2  "The  economic  considerations  underlying 
the  building  of  railroads  in  the  United  States  are 
now  fundamentally  different  from  those  existing 
fifty  and  sixty  years  ago."  At  that  time  the  greater 
part  of  the  United  States  was  sparsely  settled.     It 

^  Comparatively  little  comprehensive  study  has  been  undertaken  on 
the  subject  of  economics  of  railroad  construction  since  that  conducted  by 
the  late  A.  M.  Wellington  and  included  in  his  book  on  "Economics  of 
Railway  Location,"  which  was  first  published  in  1887  and  revised  two 
years  later.  In  spite  of  the  fact  that  a  great  many  changes  have  taken 
place  in  both  track  and  locomotive  design  and  operation  in  the  past 
twenty-five  years,  this  book  is  still  standard  today,  although  the  figures 
given  in  it  are  out  of  date.  There  is  opportunity  and  demand  for  similar 
studies  of  operating  conditions  at  the  present  time,  in  order  to  put  out  a 
standard  authority  for  use  under  present  day  operating  conditions.  The 
most  thorough  contribution  in  this  line  made  in  recent  years  was  that  by 
J.  B.  Berry  on  Grade  Revision  on  the  Union  Pacific,  published  as  a 
bulletin  of  the  American  Railway  Engineering  Association  in  1904.  A 
similar  paper  was  prepared  by  John  D.  Isaacs  outlining  the  study  made 
before  grade  revision  was  undertaken  on  the  main  line  of  the  Southern 
Pacific. 

2  "Economics  of  Railroad  Construction/'  p.  66. 


ECONOMICS  OF  R.  R.  CONSTRUCTION      87 

was  then  more  a  question  of  creating  traffic  through 
aiding  economic  development  than  of  insufficient  or 
of  oversupply  of  transportation  facihties.  In  these 
days  of  restricted  national  expansion,  however, 
railroad  construction  is  frequently  undertaken  on  a 
different  basis  than  in  earlier  years.  In  fact,  having 
in  most  cases  acquired  the  best  available  routes  and 
the  most  advantageous  territorial  connections,  fu- 
ture development  of  American  railroads  (with  the 
exception  of  the  extreme  western  lines)  will  be  largely 
a  duplication  of  transportation  facilities  by  the  con- 
struction of  competing  lines.  Moreover,  the  growth 
in  traffic  of  all  kinds,  besides  developing  rival  rail- 
road systems,  necessitates  improvements  in  the  form 
of  branches  and  feeders,  additional  main  tracks, 
revision  of  grades  and  the  like. 

The  records  of  early  railroad  building  prove  that 
capital  is  not  likely  to  be  risked  in  new  enterprises 
without  the  speculative  possibility  of  a  larger  return 
than  can  be  obtained  from  a  more  secure  investment. 
The  encouragement  given  by  the  State  and  Federal 
Governments  through  land  grants  and  other  subsidies 
to  the  early  railroads  was  a  matter  of  necessity  rather 
than  choice.  Much  traffic  is  necessary  for  profit  in 
railroad  operation;  consequently,  unless  a  line  is  built 
in  a  well  settled  territory  insufficiently  supplied 
with  railroad  facilities,  the  profits  are  purely  specu- 
lative. 

The  Nature  of  the  Prospectus.  In  view  of  the 
speculative  character  of  new  railroad  enterprises,  when 
undertaken  on  a  purely  business  basis  without  State 


88         AMERICAN  RAILROAD  ECONOMICS 

subsidy  or  guaranty,  successful  railroad  promotion 
requires  careful  analysis  of  underlying  conditions. 
Ordinarily,  when  an  independent  line  is  planned 
and  public  participation  is  invited  by  the  promoters, 
a  "prospectus"  regarding  the  enterprise  is  prepared. 
This  document  usually  gives  details  of  the  proposed 
character  and  the  route  of  the  contemplated  line; 
the  resources  of  the  country  traversed,  and  the  com- 
municating transportation  facilities  for  traffic  inter- 
change. It  also  generally  includes  the  reports  and 
opinions  of  engineers,  financiers  and  other  experts. 
These  are  naturally  favorable  to  the  venture. 

The  Estimated  Volume  of  Traffic.  Assuming  as 
feasible  the  construction  of  a  new  railroad,  the  first 
problem  in  the  prospectus  is  the  probable  volume  oj 
traffic.  Various  methods  are  followed  in  estimating 
this  item.  The  earnings  of  other  lines  in  the  same 
territory  are  sometimes  taken  as  a  basis.  The  trib- 
utary population  and  the  natural  resources  are 
elements  of  importance;  and  also  the  character  of 
the  existing  industries  or  those  capable  of  develop- 
ment. The  opportunities  of  traffic  interchange  with 
other  transportation  systems,  on  the  one  hand,  and 
the  probable  or  potential  competition  of  rival  car- 
riers on  the  other,  are  additional  factors.  That  no 
one  of  these  criteria,  singly,  offers  a  safe  and  satis- 
factory basis  for  sound  railway  promotion  is  readily 
apparent.  They  all  require  proper  weighing.  Modi- 
fications should  be  made  to  accord  with  the  pro- 
posed physical  character  of  the  line  and  the  territory 
to  be  served.    Even  after  the  most  cautious  analysis 


ECONOMICS  OF  R.  R.  CONSTRUCTION      89 

there  is  no  certainty  of  safety  of  investment,  —  un- 
less obtained  from  an  extraneous  source,  such  as  a 
State  warranty.  Whoever  advances  funds  for  the 
building  of  a  railroad,  though  possibly  a  public 
benefactor,  is  nevertheless  a  speculator.  Some 
speculation  is  absolutely  necessary  in  modern  rail- 
road promotion,  even  when  supported  by  wealthy 
and  prominent  financiers  or  by  the  credit  of  an  exist- 
ing railroad  system. 

As  an  illustration  of  the  methods  actually  em- 
ployed in  estimating  probable  traffic  on  a  proposed 
new  railroad  line,  the  following  extract  from  the 
report  of  J.  G.  White  &  Co.,  on  the  Delaware  & 
Eastern  Railway,  (when  under  construction  from 
East  Branch,  N.  Y.,  to  Schenectady,  N.  Y.),  is  given: 

The  greater  part  of  your  revenue  from  local  traffic  must  accrue  from 
the  carriage  of  freight  and  milk.  The  local  passenger  business  must  be 
relatively  small.  Outside  of  the  City  of  Schenectady,  the  population 
centers  on  the  Delaware  &  Eastern  aggregate  about  8,000  people.  The 
intermediate  sections  have  a  farming  population.  .  .  .  The  commodities 
that  will  make  up  the  bulk  of  your  local  freight  traffic,  are  principally 
lumber,  blue  stone,  agricultural  implements,  hardware  and  general 
supplies,  coal,  cement,  paints,  etc.  The  tendency  on  your  present  rail- 
road has  been  to  introduce  wood  working  factories,  acid  factories,  etc., 
so  that  a  considerable  portion  of  the  various  local  products  are  manu- 
factured into  articles  that  pay  a  high  rate  of  freight.  .  .  . 

In  the  study  of  the  probable  freight  traffic  on  this  line  it  may  be  use- 
ful to  consider  the  traffic  on  the  Ulster  &  Delaware  Railroad,  which  runs 
in  an  easterly  and  westerly  direction  from  Oneonta  on  the  Delaware  & 
Hudson  Railroad,  107  miles  to  Kingston  Point  on  the  Hudson  River. 
It  also  has  branches  aggregating  about  22  miles,  making  its  total  main 
single  track  mileage  128.9  miles.  .  .  .  The  geographical  position  of 
the  proposed  Delaware  &  Eastern  Railway  is  a  direct  line  between  the 
coal  and  iron  region  and  the  northern  portion  of  the  manufacturing  New 
England  States,  and  its  direct  connections  with  five  of  the  large  railroad 


90        AMERICAN  RAILROAD  ECONOMICS 

systems  of  the  East  would  imply  that  it  might  naturally  receive  a  good 
share  of  the  very  large  and  increasing  through  traflSc  that  is  passing  in 
both  directions  between  these  two  districts. 

The  Rates  to  be  Charged.  Volume  of  traflSc  is  but 
one  element  in  the  profitableness  of  a  transportation 
enterprise.  Of  equal  importance  are  the  rates  that 
can  be  charged.  It  was  pointed  out  in  a  previous 
chapter  that  the  economic  justification  of  the  trans- 
portation service  is  that  it  is  profitable  both  to  the 
shipper  and  to  the  transportation  company.  If  the 
shipper  does  not  profit  through  the  transportation 
of  his  goods  he  will  dispose  of  them  at  home.  If  the 
transportation  company  cannot  make  a  profit  by 
hauling  the  goods,  it  must  increase  its  charges  or  be 
operated  continuously  at  a  loss.  Hence,  the  economic 
limits  of  rates  that  can  be  charged  for  the  transpor- 
tation service.  On  a  new  railroad  it  may  not  be 
merely  a  question  of  determining  what  rates  the 
traffic  will  bear,  but  also  what  rates  will  best  en- 
courage and  develop  a  traffic  which  will  yield  the 
largest  net  revenue.  The  danger  of  fixing  the  rates 
above  this  level  even  in  the  absence  of  competition 
may  result  disastrously  to  the  security  holders.  For 
example,  a  railroad  is  built  through  a  section  favor- 
able for  dairying.  The  milk  traffic  is  estimated  to 
be  an  important  element  in  the  expected  revenue. 
In  view  of  the  special  "express  service"  required 
for  this  commodity,  the  rates  to  yield  a  profit,  must 
greatly  exceed  (from  five  to  even  ten  times  as  much) 
what  might  be  the  charge  for  ordinary  freight  ser- 
vice.   But  whether  the  dairymen  will  be  able  to  pay 


ECONOMICS  OF  R.  R.  CONSTRUCTION      91 

the  proposed  rate  depends  (1)  on  the  length  of  haul  ^ 
to  the  market  in  competition  with  milk  shipped  from 
other  localities  and  (2)  the  price  obtained  for  the 
product  at  its  destination.  If,  under  these  condi- 
tions, the  rate  is  too  high,  the  dairymen  will  not 
ship  the  milk.  They  may  convert  it  into  cheese, 
and  this  article  is  of  small  bulk  and  may  be  shipped 
as  ordinary  freight.  Hence,  the  railroad  fails  to 
obtain  the  large  revenue  expected  from  the  milk 
service. 

The  fixing  of  rates  for  lumber  traffic  in  a  forest 
region  comes  under  the  same  limitations.  Unless 
the  new  railroad  can  afford  to  encourage  timber 
operations  through  low  rates  and  through  the  build- 
ing of  tap  lines,  it  may  fail  to  develop  this  traffic. 
Thus,  many  enterprises  which  are  passed  on  favor-* 
ably  as  capable  of  securing  a  large  local  traffic  fail 
to  earn  the  sums  estimated. 

In  the  matter  of  through  business,  estimated  as 
coming  from  connecting  lines,  similar  disappoint- 
ments may  result.  Even  with  traffic  interchange 
agreements  and  joint  rates  as  described  on  p.  82,  the 
share  of  the  revenue  allotted  to  the  new  line  may 
not  be  sufficient  to  yield  a  profit.  Uncertainties  of 
this  character  are  largely  responsible  for  the  almost 
entire  absence  of  independent  railroad  promotion. 
New  construction  is  now  mainly  under  the  auspices 
of  established  railroad  systems. 
,  Selection  of  the  Route.  In  addition  to  the  calcula- 
tion of  the  probable  traffic  and  revenue,  there  are 
further  problems  requiring  solution  in  new  railroad 


92        AMERICAN  RAILROAD  ECONOMICS 

construction.  The  selection  of  the  route  is  a  factor 
of  prime  importance.  Generally,  the  proposed  line 
is  to  lie  between  two  termini,  determined  in  advance 
and  set  down  in  the  company's  charter.  Several 
routes  may  be  surveyed  with  a  view  to  both  econom- 
ical construction  cost  and  favorable  traJ05c  sources. 
A  prime  motive  is  to  bring  the  line  in  connection 
with  as  many  intermediate  centers  of  traffic  as  may 
be  possible  within  the  region  traversed.  The  tapping 
of  an  additional  traffic  center  may  mean  more  than 
a  mere  interchange  of  tonnage  with  this  point.  It 
frequently  effects  a  connecting  link  with  tributary 
communities  and  with  sections  of  territory  far  distant 
from  the  direct  route  of  the  main  line. 

The  extension  of  railroads  for  the  purpose  of 
reaching  new  stations  may  entail  heavy  additional 
construction  cost,  but  this  may  be  more  than  offset 
by  resulting  growth  in  business.  The  reason  is  that 
intercourse  and  communication  tend  to  increase  at 
an  accelerated  ratio  with  each  additional  station. 
Thus,  three  localities,  A,  B,  and  C,  when  brought 
into  communication  or  traffic  interchange,  theoretic- 
ally, will  have  six  opportunities  for  intercourse: 
A  with  B,  B  with  A,  A  with  C,  C  with  A,  B  with  C, 
and  C  with  B.  By  adding  a  fourth  station  (D)  there 
will  be  twelve  separate  opportunities  for  intercourse, 
computed  in  the  same  way,  and  when  five  localities 
are  brought  into  communication  there  are  twenty 
opportunities  for  traffic  interchange.  This  multipli- 
cation of  opportunities  continues  at  the  same  rate 
as  new  stations  are  reached.     When  new  stations 


ECONOMICS  OF  R.  R.  CONSTRUCTION      93 

aflFord  an  opportunity  for  intercourse  through  their 
existing  transportation  facihties  with  other  sta- 
tions off  the  route  of  the  new  line,  the  possible  ex- 
pansion of  business  may  be  even  greater  than  repre- 
sented in  the  above  calculations.  In  this  way, 
traffic  may  expand  in  a  geometrical  ratio  when  sta- 
tions increase  in  an  arithmetical  ratio.  The  eco- 
nomic importance  of  reaching  large  cities,  therefore, 
as  already  pointed  out  in  the  previous  chapter,  can 
hardly  be  over-estimated.  The  great  mistake  in 
the  original  construction  of  the  Erie  Railroad,  ac- 
cording to  plans  of  the  New  York  legislature,  was 
that  the  route  selected  purposely  led  away  from 
the  large  centers  of  population  in  order  not  to  have 
the  railroad  interfere  with  the  business  of  the  State 
canal. 

The  Estimate  of  Construction  Cost  is  a  problem  as 
vital  as  the  selection  of  a  proper  route.  Obviously, 
this  matter  can  be  handled  only  by  expert  engineers. 
The  physical  character  of  the  line  proposed  and  the 
volume  of  traffic  to  be  handled,  as  well  as  the  geolog- 
ical and  engineering  difficulties  which  must  be  over- 
come, are  leading  elements  in  the  cost  estimates. 
If  a  railroad  is  to  be  built  to  compete  with  high-class 
lines  for  through  business  and,  at  the  same  time, 
to  afford  equally  good  facilities  for  local  business, 
it  must  be  strongly  and  well  constructed.  More- 
over, the  topography  of  the  selected  route  must  be 
favorable  in  order  to  attract  business  from  compet- 
ing lines. 

In  estimating  construction  costs,   engineers  fre- 


94        AMERICAN  RAILROAD  ECONOMICS 

quently  study  the  experience  of  similar  lines  already 
in  operation.  This  method,  however,  may  fail  to 
consider  cost  changes  that  have  taken  place  since  the 
existing  lines  were  built.  Advances  in  property 
values,  for  example,  are  constantly  compelling  the 
railroads  to  pay  more  for  right-of-way  and  for  ter- 
minals. In  fact,  few  details  connected  with  the 
construction  of  a  new  line  or  with  the  improvement 
of  existing  facilities  are  the  source  of  so  much  trouble 
in  engineering  estimates  as  the  purchase  of  right-of- 
way  and  the  provision  of  proper  terminals.  The 
mere  announcement  of  a  railroad  project  increases 
land  values  along  the  route,  and  even  with  condem- 
nation proceedings  or  appraisal  boards,  the  railroad 
pays  the  enhanced  price.  In  one  case,  where  a 
Middle  Western  line  desired  a  right  of  way  through 
a  prosperous  farming  community,  the  farmers  man- 
aged to  have  their  friends  appointed  as  condemna- 
tion commissioners  with  the  result  that  the  road  paid 
over  $1,000  per  acre  for  right-of-way  when  adjacent 
land  was  selling  at  not  over  $150  per  acre. 

The  question  of  terminal  land  expense  is  always  a 
troublesome  one.  To  secure  a  maximum  business, 
a  railroad  must  have  its  terminals  near  the  town 
centers,  otherwise  heavy  drayage  costs  to  freight 
shippers  and  receivers,  or  the  expense  and  incon- 
venience to  passengers  in  going  to  and  from  the 
station  will  hinder  large  traffic.^  But  city  property 
is  costly,  especially  when  the  sites  are  already  oc- 
cupied by  buildings.    It  is  therefore  of  great  economic 

^  This  subject  is  discussed  in  greater  detail  on  p.  120. 


ECONOMICS  OF  R.  R.  CONSTRUCTION      95 

advantage  to  new  and  independent  lines  to  secure 
by  lease  or  joint  purchase  the  use  of  terminal  facili- 
ties of  existing  lines.  In  this  way  construction  costs 
can  be  greatly  reduced. 

In  view  of  the  topographical  disparities  and  the 
diverse  conditions  affecting  costs  of  land,  materials 
and  wages  in  different  localities  and  at  different 
times,  engineers  can  lay  down  no  definite  rules  re- 
garding the  various  elements  of  railroad  construc- 
tion costs.  The  following  table  of  percentages  com- 
piled by  John  F.  Wallace  and  published  some  fifteen 
years  ago  in  the  Engineering  Magazine,^  is  given 
merely  as  an  interesting  example  of  this  sort  of 
work. 


Element  of  Cost 


Right  of  way 

Fencing 

Grading 

Bridges  and  Culverts 

Telegraph 

Track,  Material  and  Labor  .  . 

Ballast 

Water  Supply,  Stations,  etc.  . 
Rolling  Stock  and  Equipment 

Proportion  of  Terminals 

Engineering 

General  and  Legal 


Main 

Secondary 

Line 

Main  Line 

% 

% 

5.0 

5.Q 

1.0 

1.6 

30.0 

24.0 

10.0 

10.0 

0.7 

1.2 

17.5 

25.6 

7.5 

9.6 

2.5 

2.8 

10.0 

10.0 

12.5 

6.0 

1.8 

2.0 

1.5 

1.6 

100.0 

100.0 

Minor 
Branches 

% 


6.7 

2.0 

20.0 

10.0 

1.3 

40.0 

0.0 

3.3 

9.3 

3.3 

2.7 

1.3 

100.0 


*  Quoted  by  A.  M.  Van  Ayken,  Railway  Age  Gazette^  March  8,  1912. 


96        AMERICAN  RAILROAD  ECONOMICS 

The  Fundamental  Economic  Principle  of  Modem 
Railroad  Construction.  Conscientious  railroad  pro- 
moters and  financiers  may  assure  themselves  of  the 
strategic  position  of  the  proposed  line;  of  its  resources 
and  of  its  future,  and  may  even  test  in  every  detail 
the  cost  estimates  as  to  roadbed,  superstructures, 
equipment,  terminals  and  other  essentials;  yet  they 
cannot  with  all  these  precautions  assume  that  the 
investment  will  be  reasonably  safe.  Further  pre- 
cautions are  necessary.  At  the  basis  of  all  economic 
railroad  building  lies  the  fundamental  maxim,  that 
the  construction  is  to  he  done  at  as  small  cost  as  is 
consistent  ivith  the  rate  of  return  expected  from  the 
probable  volume  of  traffic.  If  the  cost  is  excessive  the 
enterprise  will  not  pay  for  the  capital  investment. 
If  it  is  built  inadequately  for  the  traflSc  the  enter- 
prise will  likewise  prove  unsuccessful.  Such  was 
the  experience  of  the  Kansas  City,  Pittsburgh  & 
Gulf  Railroad,  the  predecessor  of  the  Kansas  City 
Southern.  After  a  receivership  and  reorganization, 
this  line  had  to  be  substantially  rebuilt  to  meet  tra£Bc 
requirements. 

That  many  American  railroads,  however,  have 
been  originally  constructed  more  cheaply  than 
present  day  standards  warrant  was  economically 
justified  by  the  character  of  traflSc  prevailing  at 
their  inception.  To  have  discounted  future  demands 
too  far  in  advance  might  have  proven  financially 
disastrous  to  the  original  owners.  In  fact,  before 
condemning  American  railroad  promoters  for  not 
having  constructed  and  equipped  the  lines  up  to  the 


ECONOMICS  OF  R.  R.  CONSTRUCTION      97 

highest  standards,  the  conditions  under  which  these 
were  built  should  be  considered.  The  railroads  of 
Europe  were  from  the  first  constructed  in  countries 
already  densely  populated  and  in  a  high  state  of 
economic  advancement.  They  were  sure  of  a  large 
traffic  from  the  start.  The  railroads  of  the  United 
States  were  largely  built  through  territory  having  a 
sparse  population  and  little  economic  development. 
They  were  required  to  attract  population  and  build 
up  industry  for  traffic.  Hence,  it  was  necessary  to 
build  them  cheaply  if  they  were  to  be  built  at  all. 
Even  though  inexpensively  constructed,  the  traffic 
for  them  was  so  light  that  only  those  situated  in  well 
developed  sections  were  able  to  earn  a  return  on 
their  comparatively  small  investment. 

Even  in  cases  where  there  is  every  probability  of 
future  development  of  large  traffic,  it  frequently  is 
a  financial  loss  to  provide  facilities  of  extended  dura- 
bility and  beyond  immediate  requirements.  Since 
money  when  compounded  at  6%  interest  yearly  will 
double  itself  in  twelve  years,  it  is  manifestly  not 
economy  to  tie  up  funds  in  idle  property  for  the  pur- 
pose of  discounting  too  far  in  advance  future  con- 
tingencies. The  fact  should  not  be  overlooked  that 
capital  expended  but  not  immediately  or  fully  used 
demands  a  current  interest  payment  the  same  as 
that  which  is  in  active  and  full  use. 

The  progressive  physical  improvement  of  American 
railroads  in  some  instances  has  effected  almost  an 
entire  reconstruction  of  the  properties.  This  ex- 
penditure in  large  part  is  the  cost  of  progress.     It 


98        AMERICAN  RAILROAD  ECONOMICS 

is  not  necessarily  due  to  errors  of  judgment  or  of 
engineering  practice.  The  cost  of  these  improve- 
ments therefore  should  be  borne  by  those  who  use 
as  well  as  by  those  who  furnish  the  transportation 
service.  Engineers  and  financiers  are  expected  to 
exercise  proper  judgment  in  sanctioning  improve- 
ments and  new  construction.  The  ordinary  layman 
who  advances  funds  for  these  purposes  or  who  is 
otherwise  financially  interested  in  railroad  enter- 
prise must  have  full  confidence  in  their  judgment, 
if  he  himself  is  not  able  to  judge  properly  the  eco- 
nomic expedience  of  such  expenditures. 

The  wisdom  of  extending  branch  mileage  is  like- 
wise a  problem  requiring  trained  judgment.  Inas- 
much as  the  construction  cost  of  a  railroad  should 
be  in  accord  with  the  traffic  over  its  lines,  it  follows 
as  a  necessary  corollary  that  a  branch  line,  feeder, 
or  any  physical  extension  or  betterment  should  not 
cause  an  additional  capital  investment  on  which 
a  fair  return  cannot  be  anticipated.  Although  it  is 
true  that  in  most  cases  branch  mileage  adds  to 
traffic  and  earning  power,  the  net  return  therefrom, 
as  measured  by  the  cost  of  the  extension,  is  fre- 
quently lower  than  the  profit  from  the  main  lines. 
No  system  of  railroad  accounting  has  yet  been 
evolved  which  can  satisfactorily  distinguish  in 
branch  mileage  between  "feeders"  which  furnish 
profits  and  "suckers"  which  cause  losses.  More- 
over, the  extension  of  branches  into  unremunerative 
territory  is  not  always  undertaken  with  the  ex- 
pectation  of   an   immediate   net  return.     Branch 


ECONOMICS  OF  R.  R.  CONSTRUCTION   99 

mileage  and  extensions  are  frequently  constructed 
or  purchased  merely  to  ward  off  competition  or  for 
political  or  remotely  speculative  reasons.  Such 
speculative  railroad  building  is  undoubtedly  an 
evil  because  of  capital  waste,  though  the  incidental 
results  may  finally  justify  the  expenditure  of  cap- 
ital. 

Because  of  the  fundamental  importance  of  gaug- 
ing construction  expenditure  not  only  of  new  rail- 
roads but  also  of  systems  already  in  operation,  it 
may  be  well  to  point  out  actual  instances  in  which 
the  economic  principle  of  confining  the  investment 
within  the  limits  on  which  a  reasonable  return  can  be 
immediately  expected  has  been  ignored.  The  Virgin- 
ian Railroad,  extending  from  the  coal  fields  at  Clear- 
water, West  Virginia,  to  tidewater  at  Norfolk,  Virginia, 
is  probably  the  best  example  of  recent  times.  The 
late  H.  H.  Rogers,  the  promoter  and  owner,  a  wealthy 
financier,  with  no  experience  in  railroad  matters,  de- 
sired to  have  a  coal  carrying  line  far  superior  to 
any  other  in  the  land.  The  latest,  most  approved 
and  most  costly  engineering  features  for  handling 
heavy  traffic  were  installed.  All  grades  were  prac- 
tically eliminated  and  curves  were  reduced  as  far 
as  possible,  though  at  heavy  capital  cost.  When 
finally  completed  to  tidewater,  at  a  construction 
cost  of  over  $185,000  per  mile,  the  railroad  was 
capable  of  hauling  over  its  lines  an  annual  traffic 
equal  to  one-half  the  then  total  coal  consumption 
in  the  United  States.  To  develop  this  amount  of 
business  may  require  the  lapse  of  a  quarter,  or  even 


100       AMERICAN  RAILROAD  ECONOMICS 

a  half  century.  The  excess  capital  expenditure, 
therefore,  when  compounded  at  the  current  interest 
rate  will  have  trebled  before  it  brings  in  a  maximum 
return.  Fortunately,  in  this  case,  a  private  estate 
bears  the  financial  burden  and  no  public  loss  en- 
tailing receivership  and  reorganization  is  involved. 

An  instance  of  spectacular  railroad  building  repre- 
senting a  physical  reconstruction  of  an  old  line  is 
the  Delaware,  Lackawanna  &  Western  "cut  off" 
extending  from  Port  Morris,  N.  J.,  to  Slateford, 
Pa.,  a  distance  of  twenty-eight  miles.  The  cost  of 
this  structure  is  reported  as  approximately  $1,500,000 
per  mile.  Its  purpose  was  the  elimination  of  curves 
and  the  shortening  of  the  route  eleven  miles  between 
New  York  and  Buffalo.  Another  "cut  off"  on  the 
same  railroad  from  Clarks  Summit  to  Hallstead,  Pa., 
thirty-eight  miles,  reducing  the  length  of  the  rail- 
road 3.6  miles  is  estimated  to  cost  when  completed 
from  $10,000,000  to  $15,000,000.  Obviously,  costly 
improvements  of  this  character  are  not  expected 
to  net  an  immediate  return  to  the  railroad  com- 
pany. The  large  earning  power  and  immense  finan- 
cial resources  of  the  Delaware,  Lackawanna  &  West- 
ern alone  render  the  expenditure  possible. 

In  contrast  with  the  liberal  construction  poli- 
cies of  the  Virginian  and  the  Lackawanna  railroads, 
the  Missouri  Pacific  may  be  taken  as  an  instance  of 
inadequate  new  capital  expenditure  through  in- 
ability to  provide  facilities  for  its  business.  Com- 
pared with  other  trunk  lines  operating  in  the  same 
territory,  its  cars  and  other  equipment  had  for  a  time 


ECONOMICS  OF  R.  R.  CdN&JHUGT.TON    lOX 

become  inferior.  The  business*  of  the  company 
could  not  be  handled  properly.  The  effect  was  an 
impairment  of  net  earning  capacity.  When  improve- 
ments are  completed  the  road  may  be  expected  to 
again  compete  favorably  for  remunerative  traffic. 


CHAPTER  V 

PHYSICAL    FACTORS    IN    ECONOMIC    OPERATION! 
WAY   AND   STRUCTURES 

The  general  principles  inherent  in  economic  rail- 
road construction  lead  up  to  the  study  of  the  phys- 
ical factors  influencing  railway  operations  and 
earnings.  The  location  of  roadbed  and  super- 
structure, the  quality  and  quantity  of  the  rolling 
stock,  the  character  of  the  terminal  facilities,  all 
are  elements  which,  combined  with  wise  financial 
policy,  efficient  management  and  a  paying  traffic 
determine  the  safety  of  the  investment  represented 
by  the  outstanding  securities.  The  problems  of 
physical  structure  belong  to  the  realm  of  the  en- 
gineer. Investors  and  transportation  students,  how- 
ever, are  also  concerned  with  these  problems  and 
cannot  afford  to  neglect  them  entirely.  Public  safety 
and  operating  efficiency  require  adequate  physical 
facilities.  Railroads  are  constantly  demanding  addi- 
tional capital  for  extensions  and  betterments.  It 
is  with  the  object  of  assisting  a  proper  judgment  as 
to  whether  the  interests  of  both  security  holders 
and  the  public  are  safeguarded  in  such  matters  that 
the  following  discussion  of  railroad  physical  features 
is  presented. 

102 


PHYSICAL  FACTORS  103 

RAILWAY   LOCATION 

A  consideration  of  location  can  be  limited  to  the 
three  leading  factors:  (1)  Distance,  (2)  Grades, 
and  (3)  Curves. 

Distance.  Though  there  is  considerable  advan- 
tage in  having  a  shortest  possible  route  between  two 
important  termini,  the  element  of  distance,  unless 
pronounced,  is  probably  the  least  important  of  the 
primary  physical  factors.  Slight  detours  to  avoid 
heavy  construction  cost  or  for  the  purpose  of  reach- 
ing cities  and  towns  are  frequently  more  economical 
than  a  direct  route,  constructed  without  reference 
to  topography  or  industrial  considerations.  To 
follow  a  water  course  regardless  of  the  windings  and 
detours  was  the  natural  route  of  early  railroad  con- 
struction. Not  only  were  easy  gradients  thus  ob- 
tained, but  the  established  centers  of  population 
and  of  traffic  were  also  reached  along  these  natural 
channels  of  trade.  It  seems,  therefore,  that  much 
of  the  large  expenditures  for  "cut-offs,"  viaducts 
and  tunnels  to  shorten  lines  are  not  economically 
justified.  Such  expenditures — caused  largely  by 
public  demands  or  the  rivalry  of  competing  lines — 
are  responsible  in  many  instances  for  the  diminish- 
ing rate  of  return  on  railroad  capital.  Railroad 
security  holders,  in  consequence,  have  frequently 
undergone  losses  in  thus  promoting  public  con- 
venience. 

Grades.    Grade  is  probably  the  principal  feature* 
of    location    affecting    railroad   operations.      Steep 


104       AMERICAN  RAILROAD  ECONOMICS 

grades  by  increasing  the  resistance  to  be  overcome 
by  the  locomotive  have  a  pronounced  effect  on 
operating  costs.  When  the  incHne  of  the  roadbed 
rises  but  a  few  inches  for  each  one  hundred  feet  dis- 
tance there  is  usually  reduction  of  speed  and  an 
extra  strain  on  the  equipment.  The  use  of  addi- 
tional locomotives  to  the  train  may  be  required. 
All  this  adds  to  the  expense  of  fuel,  wages  and  up- 
keep. 

As  the  weakest  link  gauges  the  strength  of  a  chain, 
so  the  steepest  grade,  (i.  e,,  the  so-called  ruling  grade) 
restricts  the  size  of  the  train  and  the  maximum 
hauling  power  of  a  locomotive  over  a  given  stretch 
of  line.  If  the  slant  downward  is  in  the  direction 
of  the  bulk  of  the  traffic,  the  incline  is  a  '' favorable 
grade,*'  since  the  hauling  becomes  a  coasting  opera- 
tion. This  is  a  decided  advantage  to  economical 
operation  and  calls  for  no  elimination  of  grade.  A 
study  of  grades  with  reference  to  economical  opera- 
tion, therefore,  requires  a  knowledge  of  the  ''direc- 
tion of  the  traffic."  Both  the  Chesapeake  &  Ohio  and 
the  Norfolk  &  Western  railroads  have  relatively 
heavy  grades.  As  the  freight  carried  is  chiefly  coal, 
mined  in  the  Allegheny  Mountains  and  shipped  to 
Eastern  tidewater  or  to  the  Ohio  valley  in  the  West, 
the  grades  are  for  the  most  part  favorable.  They 
do  not  interfere  with  heavy  train  loading.  Similarly, 
heavy  grades  on  branch  lines  having  a  small  traffic 
are  frequently  of  little  consequence  as  a  factor  in 
operating  efficiency.  Their  elimination  accordingly 
is  not  economically  justified  if  the  expense  will  not 


PHYSICAL  FACTORS  105 

be  suflSciently  compensated  by  reduced  operating 
costs. 

The  constant  reduction  of  grades  has  been  a 
prominent  feature  of  American  railway  structural 
development.  A  quarter  of  a  century  ago  a  one 
per  cent.  (1%)  grade  was  considered  the  inferior 
limit  that  economy  of  operation  on  any  line  required., 
But  on  many  of  the  railroads  having  a  heavy  traflSc 
a  one  per  cent,  grade  is  like  a  modern  harbor  channel 
only  deep  enough  for  sailing  vessels.  In  fact,  grade 
reduction  has  progressed  to  an  extent  that  causes  a 
query  whether  much  of  this  expense  is  not  waste. 
No  one  knows  yet  what  it  is  worth  to  any  road  of  a 
given  character  of  traffic  to  reduce  its  grades  to  one- 
tenth  of  one  per  cent.  i.  e.,  an  incline  of  one  foot 
for  each  1000  feet  of  distance.  A  prominent  railroad 
engineer,^  placed  the  inferior  limit  at  four-tenths  of 
one  per  cent.,  but  many  of  the  companies  have  spent 
and  are  spending  large  sums  in  reducing  grades  as 
low  as  two-tenths  of  one  per  cent.^  Is  the  capital 
thus  invested  wasted  .^^ 

A  low-grade  line  in  competition  with  a  line  of 
heavier  grades  is  generally  held  to  have  many  ad- 
vantages. To  eliminate  unfavorable  grades,  some 
companies  justify  the  expense  of  relocating  whole 
.sections  of  line.  Thus,  the  Atchison,  in  order  to 
have  a  low-grade  freight  route  over  the  Rockies, 
built  a  new  line  extending  from  Kansas   City  to 

iMr.  Barry,  in  Bulletin  ^9  of  the  Railway  Maintenance  of  Way 
Association. 

2  See  Walter  Loring  Webb  in  Railway  Age  Gazette,  March  28,  1913. 


106       AMERICAN  RAILROAD  ECONOMICS 

Rio  Puerco,  a  distance  of  approximately  1000  miles. 
The  maximum  grade  on  this  division  does  not  ex- 
ceed six-tenths  of  one  per  cent.  The  Erie,  likewise, 
has  lately  constructed  a  new  low-grade  line  (the 
Genesee  River  Railroad)  on  its  heavy  traffic  divi- 
sions between  Hornell  and  Cuba,  N.  Y.,  which  re- 
duces the  maximum  grade  from  one  per  cent,  to  two- 
tenths  of  one  per  cent.  This  improvement,  though 
costly,  materially  adds  to  transportation  capacity 
and  more  economical  operation. 

Curves.  Though  affecting  operating  costs  less 
than  grades,  curves  are  of  no  small  consequence  in 
the  estimation  of  railroad  physical  qualities.  Be- 
sides limiting  speed  of  trains  and  lessening  locomo- 
tive hauling  power,  curves  cost  more  to  maintain 
and  to  operate  than  straight  stretches  of  track. 
They  are  also  a  fertile  source  of  accidents.  Curva- 
ture in  railroad  construction,  therefore,  is  tolerated 
only  because  of  the  heavy  cost  of  its  elimination. 
The  same  economic  considerations  apply  here  as 
in  the  case  of  grades.  Curve  elimination  should  be 
in  accord  with  traffic  demands,  and  the  capital  ex- 
penditure thus  incurred  should  not  exceed  a  proper 
economic  limit.  This  means  that  the  resulting  de- 
creased operating  costs  or  enlarged  traffic  capacity 
is  to  fully  compensate  for  the  cost  of  the  curve  elimi- 
nation. 

ROADBED  AND   SUPERSTRUCTURE 

Physically  a  railroad  is  anything  from  a  mud 
bank  with  two  streaks  of  iron  rust  to  a  multi- tracked, 


I 


PHYSICAL  FACTORS  107 

rock-ballasted  steel  highway  equipped  with  con- 
trivances for  safety,  speed,  comfort  and  economy. 
The  wide  disparities  in  physical  structure  not  only 
confine  comparisons  among  railroads  within  very 
narrow  limits,  but  also  render  difficult  the  adoption 
or  establishment  of  proper  and  satisfactory  stand- 
ards for  measuring  the  adequacy  of  transportation 
facilities  or  of  efficiency  methods.  Many  factors 
are  to  be  considered  in  arriving  at  a  basis  of  judg- 
ment in  these  matters,  and  the  relative  values  of 
these  factors  are  constantly  changing.  To  describe 
in  detail  all  physical  features  bearing  on  operation 
is  manifestly  uncalled  for  here.  Attention  is  directed 
only  to  the  main  factors,  data  concerning  which  are 
contained  in  railroad  reports  and  in  statements 
filed  with  the  Interstate  Commerce  Commission. 
These  factors,  considered  in  order,  are  (1)  Track 
Facilities,  (2)  Rails,  (3)  Ties,  (4)  Ballast,  (5)  Bridges 
and  Trestles,  (6)  Tunnels  and  (7)  Terminal  Facilities. 

Track  Facilities.  Nearly  all  important  railroads  in 
the  United  States  have  the  standard  gauge  track, 
i.  e,,  4  feet  Sj^^  inches  width  between  the  rails.  The 
percentage  of  narrow  gauge  (i.  e.,  three  feet  width), 
on  a  few  lines,  however,  is  not  a  negligible  factor. 
The  Denver  &  Rio  Grande  had  on  June  30,  1912, 
787  miles  of  narrow  gauge  road  in  operation  of  a 
total  mileage  of  2,597  miles.  This  is  by  far  the 
largest  ratio  of  narrow  gauge  mileage  of  any  of  the 
important  railroad  systems  of  the  United  States. 

In  the  consideration  of  trackage,  the  ''miles  of 
line"  should  be  clearly  distinguished  from  the  miles 


108       AMERICAN  RAILROAD  ECONOMICS 

of  single  track,  or,  to  use  another  expression,  "total 
miles  of  track,''  The  vast  differences  in  the  extra 
track  facihties  of  American  railroads,  of  itself,  is 
sufficient  to  nullify  the  usefulness  of  a  per  mile  of  line 
unit  for  general  comparative  purposes.  Extra  tracks 
(second,  third  and  fourth,  etc.)  entail  additional 
capital  expense  and  higher  maintenance  costs  and, 
therefore,  are  expected  to  increase  earning  power. 
The  proportion  of  extra  main  tracks  has  a  direct 
relation  to  the  amount  of  business  done.  Accord- 
ingly, companies  handling  relatively  the  same  vol- 
ume and  character  of  traffic  apparently  require  the 
same  proportion  of  extra  track  mileage.^ 

Figuring  on  the  needs  of  extra  track  facilities  on 
the  leading  railroads  can  be  reduced  to  somewhat 
of  a  mathematical  certainty.  On  practically  all 
lines,  a  schedule  must  be  arranged  to  allow  for  trains 
running  at  different  speeds  going  in  the  same  direc- 
tion as  well  as  for  trains  passing  in  opposite  direc- 
tions on  the  same  track.  Delays  of  one  train  on  a 
single  track  division  caused  by  the  taking  on  and 
the  discharge  of  freight  and  passengers,  or  through 
accidents,  entail  a  general  "tie  up."  The  result- 
ing losses  due  to  extra  wages  and  fuel  expense,  idle 
equipment,  freight  congestion  and  the  like,  impair 
profits.  Besides,  there  is  the  unfavorable  effect 
of  inconveniencing  the  pubKc  and  lowering  the 
character   of   the   transportation   service.      All   this 

^  There  is  a  distinction  between  "extra  main  track"  and  "extra 
track."  The  former  does  not  include  sidings,  spurs,  and  "yard  "tracks, 
which  are  classified  separately  in  the  reports. 


I 


PHYSICAL  FACTORS  109 

is  bound  to  reduce  the  return  on  the  invested  capital. 
Whether  such  conditions  can  be  remedied  more 
economically  by  the  construction  of  additional  main 
track  or  through  better  management  and  higher 
operating  eflSciency  is  a  problem  which  the  railroad 
executive  must  consider.  Competition  and  the 
relative  ease  with  which  funds  can  be  obtained  for 
betterment  purposes  have  an  important  bearing  on 
the  problem.  Capital  expenditures  for  increased 
facilities,  which  are  not  urgently  needed,  as  has  al- 
ready been  pointed  out,  cause  a  reduction  of  the 
rate  of  return  on  the  whole  investment  in  the  rail- 
road property.  On  the  other  hand,  a  company  with 
track  facilities  inadequate  for  its  business  will  oper- 
ate at  a  decided  disadvantage  in  competition  with 
lines  better  equipped.  This  arises  in  part  from  the 
well  accepted  theory  that  overtaxed  facilities  reverse 
the  economic  basis  of  railroad  operation.  Under 
such  circumstances  the  transportation  business  is 
one  of  "decreasing  returns"  rather  than  of  *' increas- 
ing returns."  In  other  words,  a  railroad  company 
that  is  handling  traffic  beyond  its  capacity  toill  undergo  ^ 
additional  costs  proportionately  greater  than  the  reve- 
nues gained  by  the  extra  traffixi.  This  causes  a  de- 
creased rate  of  profit  on  the  whole  business. 

The  position  of  the  Wabash  Railroad  Company, 
during  the  years  1908-1912,  may  be  taken  as  an 
illustration.  Because  of  the  financial  losses  involved 
in  the  acquisition  of  the  Wabash-Pittsburgh  Ter- 
minal Company,  the  Wabash's  credit  became  im- 
paired.    It  was  thus  unable  to  obtain  capital  fca: 


no      AMERICAN  RAILROAD  ECONOMICS 

the  additional  physical  facilities  demanded  by  its 
growing  traffic.  Consequently,  in  spite  of  enlarged 
gross  earnings  (which  in  1911  were  relatively  about 
20  per  cent,  greater  than  in  1905),  the  ratio  of  in- 
crease in  expenses  exceeded  that  of  income.  The 
company  found  difficulty  in  meeting  bond  interest 
requirements.  A  receivership  and  reorganization  was 
the  natural  outcome. 

The  detrimental  operating  effects  of  inadequate 
track  facihties  may  be  further  pointed  out  with 
reference  to  the  Erie  Railroad.  Notwithstanding  its 
large  traffic  expansion  and  its  position  as  an  im- 
portant Eastern  trunk  line,  the  Erie  because  of  in- 
ability to  obtain  capital  on  reasonable  terms  had 
been  struggling  along  with  approximately  300  miles 
of  its  main  line  a  single  track  road.  On  one  stretch 
of  single  track  some  fifty  miles  east  of  Chicago,  the 
regular  daily  movement  of  business  is  reported  to 
have  included  700  loaded  eastbound  freight  cars, 
500  westbound  loaded  freight  cars,  and  seven  pas- 
senger trains  each  way.  A  freight  train,  no  matter 
how  profitable  it  might  be,  is  invariably  sidetracked 
for  a  passenger  train.  This  means  that  it  is  held 
"idle"  on  a  siding  to  let  the  passenger  train  pass. 
If  the  two  trains  happen  to  be  going  in  the  same 
direction  the  delay  to  the  freight  train  may  be  only 
a  few  minutes;  if  they  are  going  in  opposite  direc- 
tions the  freight  train  may  lose  an  hour  or  more. 
If  there  is  a  "mishap,"  a  half-day  tie  up  may  be  the 
consequence.  With  700  loaded  cars  and  seven 
passenger  trains  going  one  way  and  500  loaded  cars 


I 


PHYSICAL  FACTORS  111 

and  seven  passenger  trains  going  another,  (not 
counting  work  trains  and  trains  of  empty  cars) 
there  is  Httle  leeway  for  efficient  and  expeditious 
service  or  further  traffic  expansion.  The  losses  on 
a  single  track  road  from  unavoidable  delays  devour 
the  increased  revenue  gained  from  additional  busi- 
ness. In  competing  with  the  Baltimore  &  Ohio, 
the  Pennsylvania  and  the  New  York  Central  (hav- 
ing two,  four  and  six- track  lines),  the  Erie,  from 
the  viewpoint  of  operating  economy  has  been  like  a 
man  fighting  with  one  hand  tied  behind  him.  If, 
as  is  reported,  a  second  track  normally  increases  the 
possible  efficiency  of  a  road  120  per  cent,  the  Erie 
operating  management  in  the  last  decade  has  been 
distinctly  creditable.  With  its  insufficient  extra 
track  equipment  the  company  handled  in  proportion 
to  its  mileage  more  freight  business  than  the  New 
York  Central  System  which  has  four  tracks  all  the 
way  from  New  York  to  Chicago.  But  has  the  Erie 
been  able  to  serve  as  well  the  needs  of  the  shipper 
and  the  public  at  as  low  a  cost  as  is  possible  under 
the  best  operating  conditions.?  This  is  the  problem. 
Railroad  earning  power  rests  not  alone  on  perform- 
ing the  transportation  service,  but  performing  it 
efficiently  and  economically. 

In  comparing  the  track  facilities  of  different  rail- 
roads in  relation  to  traffic,  account  must  be  taken 
of  the  relative  proportions  of  main  line  and  branch 
line  mileage.  Branches  and  "feeders,"  as  a  rule, 
have  a  smaller  traffic  than  the  main  lines.  Accord- 
ingly the  need  for  extra  track  is  not  so  pronounced. 


112      AMERICAN  RAILROAD  ECONOMICS 

Caution  is  required,  however,  in  the  definition  of 
branch  lines.  These  on  some  railroads  have  a 
heavier  traffic  than  main  line  mileage  on  other  sys- 
tems. The  absence  of  standardization  renders  com- 
parisons exceedingly  difficult. 

Rails.  A  fairly  large  number  of  railroads  report 
the  quality  and  character  of  the  rails  in  the  tracks. 
Rail  facilities  are  measured  by  weight.  This  may 
range  from  50  to  110  pounds  per  yard  length.  For 
ordinary  service  on  the  main  line  of  a  modern  rail- 
road system  a  75  pound  rail,  is  generally  the  mini- 
mum weight  that  can  be  safely  used.  With  the  con- 
stant tendency  toward  heavier  rolling  stock  and 
greater  speed,  an  85  pound  rail  is  fast  becoming  the 
standard.  Taking  the  progress  of  the  Norfolk  & 
Western  Railroad  as  typical,  we  find  that  on  June  30, 
1898,  of  a  total  of  1,496  miles  of  main  track,  over 
1,206  or  slightly  more  than  80  per  cent,  had  rails  of 
67  pounds  per  yard  or  under.  On  June  30,  1911, 
^however, — thirteen  years  later, — the  67  pound  rail 
had  very  nearly  disappeared  and  more  than  80  per 
cent,  of  main  track  was  laid  with  85  pound  rails. 
There  was,  in  addition,  about  196  miles  having  100 
pound  rails.  Because  of  enlarged  traffic  and  heavier 
equipment,  the  light  weight  rails  are  constantly 
displaced  by  a  heavier  and  more  durable  quality. 

Weight  of  rails  in  all  cases  should  be  properly  ad- 
justed to  the  traffic  and  to  the  size  of  the  equipment 
which  is  to  pass  over  them.  The  mere  statement 
that  one  company  has  a  larger  proportion  of  heavy 
rails  than  another,  even  though  the  business  handled 


I 


PHYSICAL  FACTORS  113 

is  similar,  is  of  no  consequence  unless  a  correct  dis- 
tinction is  made  between  branch  line  and  main  line 
mileage.  The  fact  that  the  Kansas  City  Southern 
has  a  smaller  percentage  of  light  weight  rails,  (i.  e., 
under  75  pounds  to  the  yard)  than  the  Southern 
Railway  or  the  "Frisco,"  is  probably  due  to  the 
former's  small  amount  of  branch  mileage  relative 
to  that  of  the  other  two  systems.  In  each  instance 
the  information  desired  is  whether  the  character 
of  rails  on  every  section  of  track  is  best  suited  to  the 
traffic. 

Use  of  rail  statistics  as  contained  in  the  railroad 
annual  reports  is  best  applied  in  the  analysis  of  pro- 
gressive physical  betterment.  An  increase  in  the 
proportion  of  heavy  to  light  weight  rails  from  year 
to  year  usually  indicates  progress  both  in  volume 
of  traffic  and  in  the  facilities  for  handling  same. 

Although  a  standard  quality  of  steel  rail  has  been 
adopted  in  the  United  States,  the  leading  railroad 
companies  because  of  the  use  of  heavier  locomotives 
and  cars,  and  because  of  larger  train-loads  and  in- 
creased speed  in  both  passenger  and  freight  service 
are  requiring  a  superior  quality  of  rail  designed  for 
safety  and  durability.  Serious  accidents  result  from 
broken  rails  caused  by  "crystallization"  or  by  ex- 
cessive strain.  Some  progress  in  rail  betterment  has 
been  made  through  the  substitution  of  the  "Open 
Hearth"  for  the  "Bessemer"  rail.  The  former  con- 
tains less  phosphorus  than  the  "Bessemer"  rail  and 
is,  therefore,  less  liable  to  "crystallize."  It  also  can 
be  more  readily  "alloyed"  with  other  metals  and 


114      AMERICAN  RAILROAD  ECONOMICS 

chemicals  for  improving  quality  and  durability. 
Much  experimentation  is  yet  necessary  to  afford  a 
standard  adapted  to  all  the  needs  of  modern  rail- 
road operation.  ^ 

No  definite  rule  can  be  followed  as  to  the  proper 
rate  of  rail  renewals  on  a  railroad  system.  Deteriora- 
tion, wear  and  tear  and  breakage  are  affected  by 
many  factors  besides  the  volume  of  traflSc.  Climate, 
for  example,  is  a  potent  factor.  On  some  of  the 
Eastern  trunk  lines  an  85  pound  standard  rail  is 
said  to  have  an  average  life  of  from  ten  to  fifteen 
years.  At  the  end  of  this  time  the  rail  is  not  worth- 
less. It  can  be  taken  up  and  placed  on  a  branch  line 
or  on  a  siding.    On  some  of  the  larger  systems  (the 

^  Statistics  showing  the  quality  and  weight  of  rails  in  main  tracks  of 
American  Railroads,  January  1,  1912,  according  to  a  special  committee 
of  the  American  Railway  Association,  are  as  follows: 

Rail  in  Main  Track 

Oyen         Special 

Bessemer       Hearth          Alloy  Total 

Percent 87.47         11.43            1.10  100.00 

Per  cent, 

100  pounds  and  upward 5 .  845 

90  pounds  and  less  than  100 8.324 

80  pounds  and  less  than    90 32.941 

75  pounds  and  less  than    80 12.809 

70  pounds  and  less  than    75 8.564 

60  pounds  and  less  than    70 18.158 

Less  than  60  pounds 

Mixed 13.314 

Unknown 

Iron .  045 


Total 100.00 


PHYSICAL  FACTORS 


115 


Union  Pacific  for  example),  it  is  the  practice  to  re- 
roll  heavy,  worn-out  rails  for  use  on  branches  requir- 
ing only  light  weight  rails.  The  period  of  usefulness 
is  thus  extended  and  at  the  same  time  the  quality 
of  the  rail  is  improved  through  re-rolling. 

Wrecks  from  broken  and  worn-out  rails  are  costly 
accidents.  The  question  of  rail  maintenance,  there- 
fore, is  important  both  to  railroad  investors  and  to 
the  travelling  public.  Some  indication  of  what  is 
being  done  in  this  matter  may  be  had  by  a  compari- 
son of  rail  renewals  of  individual  companies  from 
year  to  year,  expressed  in  tons;  not  neglecting  the 
expansion  that  may  have  taken  place  in  the  track 
mileage  or  in  the  amount  of  business  passing  over 
each  mile.  It  should  also  be  borne  in  mind  that  with 
improvement  in  rail  quality  and  durability,  the  rate 
of  renewals  will  consequently  decline.^ 

Ballast.  The  requirements  of  a  strong,  firmly 
fastened  track  on  a  solid  roadbed  to  accommodate 
loaded  modern  railroad  equipment  magnifies  the 
importance  of  ballast  as  a  physical  factor  in  eco- 

1  The  tonnage  of  new  rails  actually  used  by  the  Pennsylvania  Railroad 
has  been  as  follows: 


1912 153,693 

1911 111,799 

1910 162,790 

1909 137,665 

1908 31,563 


1907 149,878 

1906 163,797 

1905 128,075 

1904 110,591 

1903 156,522 


This  record  shows  that  the  company  uses  the  maximum  of  rails  in  the 
years  of  heavy  traflSc  (1903,  1906,  1910),  and  the  minimum  in  years  of 
industrial  depression  (1904,  1908,  and  1911). 


116      AMERICAN  RAILROAD  ECONOMICS 

nomical  railroad  operation.  The  materials  used  for 
ballast  range  from  ordinary  soil  to  sand,  cinder, 
burnt  clay  and  broken  granite  rock.  The  geology 
of  the  territory  traversed  by  a  railroad  system  fre- 
quently determines  the  ballast  material  rather  than 
the  volume  of  traffic  handled  or  the  general  mainte- 
nance policy  of  the  management.  To  haul  ballast 
a  long  distance  adds  greatly  to  its  cost.  Hence,  a 
railroad  in  a  region  of  poor  ballasting  materials  may 
use  an  inferior  product  as  most  economical,  even 
though  there  is  heavy  expense  of  upkeep  because  of 
frequent  renewal.  The  Union  Pacific,  for  example, 
is  very  heavily  ballasted  with  Sherman  gravel,  a 
disintegrated  rock,  possibly  the  finest  material  for 
the  purpose  in  the  United  States.  Moreover,  be- 
cause of  its  availability  to  some  of  the  Union  Pacific 
lines,  it  is  relatively  cheap.  The  Chicago  &  North 
Western,  on  the  other  hand,  is  rather  lightly  ballasted 
with  gravel,  sand  and  other  materials  of  inferior 
quality  because  of  the  poor  geological  resources  of 
the  prairies  traversed.  Similarly,  the  Canadian 
Pacific,  from  Montreal  to  Quebec,  a  distance  of  178 
miles,  is  largely  ballasted  with  sand,  the  only  ma- 
terial economically  available.  These  differences  in 
conditions  are  naturally  reflected  both  in  construc- 
tion and  in  maintenance  costs.  These  costs,  when 
suflSciently  accounted  for,  should  not  mislead  the 
railroad  analyst. 

A  few  railroad  companies  publish  statistics  of  the 
depth  as  well  as  of  the  constituent  of  ballast.  This 
information,  however,  can  be  interpreted  properly 


PHYSICAL  FACTORS  117 

only  in  connection  with  the  size  of  the  ties  and  their 
average  distance  apart  in  the  track.  The  kind  of 
material  used  has  no  necessary  relation  to  the  depth 
of  the  ballast.  In  practice,  however,  stone  ballast 
generally  has  a  less  depth  than  gravel  or  other  light 
material.  This  is  probably  due  to  the  higher  cost 
of  stone. 

Ties.  In  view  of  the  constant  upward  trend  of 
lumber  prices,  tie  economy  has  become  one  of  the 
most  fruitful  means  of  keeping  down  track  mainte- 
nance costs.  Naturally,  a  high  speed  track  with 
heavy  traffic  requires  better  ties  than  a  track  with 
light  trains,  but  it  does  not  necessarily  follow  that 
a  much  used  track  requires  more  frequent  tie  re- 
newals. The  question  of  the  maintenance  lies  in 
the  natural  decay  of  the  tie.  On  a  carefully  ballasted, 
well  drained  track,  notwithstanding  heavy  usage, 
decay  will  not  be  as  rapid  as  on  a  badly  ballasted, 
improperly  drained  track.  Thus  the  length  of  life 
of  a  tie  depends,  (a)  on  its  quality  (z.  e,,  whether 
cypress,  oak  or  pine),  (b)  whether  "treated"  {i.  e., 
prepared  with  creosote  or  other  decay-resisting 
chemicals)  and  (c)  the  care  with  which  it  is  placed 
and  maintained  in  the  roadbed.  Very  few  railroads 
furnish  a  clear  statement  of  the  quality  of  the  ties 
or  of  the  amount  of  tie  renewals.  Though  probably 
not  as  important  in  gauging  railroad  physical  char- 
acteristics as  rails,  well-kept  ties  are  essential  to 
efficient  and  economical  transportation  service. 
Furthermore,  tie  renewal  cost  constitutes  the  largest 
single  item  among  track-materials  costs.    Wooden 


118       AMERICAN  RAILROAD  ECONOMICS 

ties  of  good  quality  (cypress  and  oak)  have  become 
so  costly  that  some  companies  are  endeavoring  to 
substitute  other  materials,  such  as  steel  and  con- 
crete. Experiments  along  these  lines  have  not  been 
advanced  sufficiently  to  permit  proper  judgment  as 
to  the  propriety  of  ultimately  replacing  wooden 
ties. 

The  distribution  of  the  various  grades  of  ties — 
hard  wood  and  soft  wood,  treated  and  untreated — over 
a  large  railroad  system  should  be  adjusted  so  that 
each  grade  will  give  the  most  economical  service. 
Similarly,  the  keeping  of  accurate  and  complete  tie 
renewal  records  to  eliminate  waste  and  double  haul 
on  ties  supplied  in  excess  of  requirements  can  effect 
a  considerable  saving  in  tie  maintenance  expense. 
The  engineering  departments  of  some  railroads  have 
made  a  careful  study  of  this  problem  and  now  have 
in  operation  schedules  of  tie  distribution.  The  selec- 
tion of  one  class  of  tie  rather  than  another  on  a  given 
division  depends  on  the  climate,  the  traffic,  the 
weight  of  rail,  the  depth  and  kind  of  ballast,  the 
use  of  tie-plates  and  fastenings  and  the  location  of 
the  line  with  reference  to  the  tie  supply. 

Bridges  and  Trestles.  Bridges  and  trestles,  as 
elements  in  railroad  operation,  limit  the  size,  weight 
and  speed  of  trains  in  much  the  same  way  as  grades 
and  curves.  A  "weak"  bridge  on  a  line  of  heavy 
traffic  may  necessitate  the  "breaking-up"  of  trains 
or  the  slowing  down  in  speed,  both  of  which  add 
materially  to  operating  expenses.  Moreover,  the 
frequent  burdening  of  a  structure  with  its  maximum 


I 


PHYSICAL  FACTORS  119 

bearing  capacity  produces  stresses  that  may  lead 
to  breakdowns  and  wrecks.  These  are  costly  acci- 
dents in  the  business  of  rail  transportation.  Thus, 
the  material  and  quality  of  bridges  and  trestles  are 
prime  factors  in  economical  railroad  operation.  The 
tendency  toward  betterment  and  improvement  in 
bridge  construction  should  be  carefully  considered. 
The  replacement  of  obsolete  bridges  and  trestles  by 
stronger  and  more  durable  structures  is  as  pertinent 
to  railroad  economic  progress  as  larger  revenues  and 
greater  net  earnings. 

The  original  timber  trestle  bridges,  where  they 
still  exist,  are  on  most  lines  a  survival  of  a  by-gone 
era.  Their  first  substitutes  of  iron  or  steel  seem 
also  to  be  doomed  to  give  way  to  structures  better 
able  to  bear  the  stress  of  the  ponderous  locomotives 
and  long  trains  of  gigantic  freight  cars  that  are  now 
becoming  standard  rolling  stock.  Unless  bridges 
are  carefully  strengthened  or  replaced  with  new 
structures,  suitable  to  the  weight  of  heavy  rolling 
equipment,  a  single  accident  may  cause  greater  ex- 
pense than  the  precautionary  outlay  would  entail. 
Railroad  engineers,  therefore,  fully  alive  to  this  con- 
tingency, are  endeavoring  to  determine  the  reason- 
able hmits  of  capacity  bridges  should  be  required  to 
show  beyond  the  weight  of  the  heaviest  trains  pass- 
ing over  them.  Important  data  in  this  connection 
have  been  compiled  by  the  American  Railway  En- 
gineering Association.  This  information  is  of  great 
service  in  successful  railroad  construction  and  opera- 
tion. 


120      AMERICAN  RAILROAD  ECONOMICS 

• 

Tunnels.  The  relation  of  tunnels  to  operating 
costs  is  not  so  apparent  as  in  the  case  of  bridges  and 
trestles.  Yet,  aside  from  the  higher  cost  of  tunnel 
maintenance  as  compared  to  that  of  "open  cuts," 
no  other  physical  feature  limits  so  effectively  trans- 
portation capacity  or  leads  so  much  to  traffic  con- 
gestion. Moreover,  the  construction  of  tunnels  is 
exceedingly  costly.  Intelligent  railroad  engineers 
plan  to  do  without  them  as  much  as  possible.  They 
are  built  and  tolerated  to  avoid  either  a  wide  detour 
or  an  extremely  costly  *'open  cut." 

A  good  example  of  tunnel  construction  limiting 
transportation  capacity  and  adding  greatly  to  operat- 
ing costs  is  the  old  Bergen  Hill  Tunnel  of  the  Erie 
Railroad.  When  this  was  built  its  two  track  width 
and  other  structural  qualities  were  regarded  as  suffi- 
cient to  accommodate  the  maximum  traffic  that  the 
company  was  capable  of  developing.  In  a  few 
decades,  however,  growth  of  business  at  the  New 
York  terminal  demanded  larger  track  facilities.  Be- 
cause of  the  impracticability  of  enlarging  the  Bergen 
Tunnel,  these  could  not  be  built.  The  result  was 
that,  aside  from  the  relatively  heavier  operating 
costs  due  to  traffic  congestion,  the  Erie  could  not 
furnish  the  same  standard  of  transportation  service 
at  its  Eastern  terminal  as  competitors.  Finally, 
at  heavy  capital  cost  and  with  much  difficulty,  a 
wholly  new  "cut-off"  was  built  to  get  rid  of  the 
"Bergen  nuisance." 

Railroad  Terminals.  Terminal  facilities  are  an 
element  in  economic  railroad  operation  that  is  fre- 


I 


I 


PHYSICAL  FACTORS  121 

quently  overlooked.  The  necessity  of  having  sta- 
tions and  depots  at  centers  of  population  and  of 
industry  to  retain  and  promote  traffic  is  fully  recog- 
nized by  capable  railroad  executives  who  justify  the 
vast  expenditures  for  enlarged  and  improved  ter- 
minals on  this  ground.  ^  The  large  expense  of  acquir- 
ing terminal  property,  in  fact,  is  largely  responsible 
for  much  of  the  recent  heavy  increases  in  railroad 
capitalization. 

Aside  from  improper  location,  however,  a  railroad 
company  may  suffer  many  disadvantages  from  in- 
adequacy of  terminal  facilities.  The  expense  of 
handling  traffic  at  terminals  is  a  large  though  ill- 
defined  item  in  railroad  operating  costs.  This  ex- 
pense is  greatly  augmented  through  over-crowded 
yards  and  stations,  or  through  insufficient  and  ob- 
solete terminal  equipment.  As  has  already  been 
pointed  out,  whenever  larger  business  is  received 
than  can  be  conveniently  accommodated,  the  operat- 
ing costs  increase  in  greater  proportion  than  the  en- 
larged revenues  until  a  trend  of  "diminishing  re- 
turns" is  reached.  If  unabated,  this  condition  may 
prove  disastrous  to  the  interests  of  the  stockholders. 

The  difficulty  in  the  way  of  proper  railroad  ter- 
minals, as  already  stated  on  page  94,  is  the  heavy 
cost  of  acquiring  urban  property.  Development  of 
the  country  has  produced  great  cities,  where  land 
has  risen  to  very  high  values.     At  the  same  time, 

1  Mr.  A.  M.  Wellington  in  his  treatise  on  "  Railway  Location,"  (p.  64) 
places  the  loss  of  revenue  of  a  railroad  for  each  mile  a  terminal  or  station 
is  distant  from  the  center  of  traffic  at  from  10%  to  25%. 


122       AMERICAN  RAILROAD  ECONOMICS 

it  has  produced  a  vast  increase  of  railroad  traffic  at 
these  centers.  All  this  necessitates  larger  urban 
terminals,  aside  from  the  additional  tracks  and 
safety  devices  required  by  the  denser  traffic.  Could 
this  larger  volume  of  traffic  be  handled  without  addi- 
tional tracks  and  terminals,  a  substantial  reduction 
would  result  in  railroad  operating  costs.  Much  of 
the  economy  in  operations  outside  of  terminals, 
effected  by  doubling  tracks,  strengthening  bridges 
and  installing  block  signals  and  the  like,  are  un- 
doubtedly swallowed  up  by  the  enormous  cost  of 
new  city  terminals  necessary  for  the  handling  of  the 
greater  traffic.  A  railroad  cannot  handle  well  the 
business  of  100,000,000  tons  annually  with  terminals 
built  and  equipped  to  accommodate  the  handling 
of  but  60,000,000  tons. 

Railroad  expansion,  by  stimulating  the  growth 
of  great  cities,  has  caused  an  enormous  enhance- 
ment of  property  values.  Accordingly  some  rail- 
roads now  find  themselves  compelled  to  buy  property 
for  enlarged  terminals  at  the  enhanced  values  which 
they  have  largely  created.  The  Pennsylvania  has 
spent  over  $100,000,000  on  its  tunnels  and  terminals 
in  New  York  City  and  is  about  to  incur  similar  ex- 
pense in  Philadelphia.  The  New  York  Central 
has  been  driven  to  make  expenditures  exceeding 
$75,000,000  in  New  York  City.  Developments  of 
the  same  kind  are  taking  place  in  Chicago.  The 
Wabash  Railroad,  figuratively,  broke  its  back  in 
acquiring  Pittsburgh  terminals  at  heavy  cost. 

Besides  the  general  terminal  facilities  in  the  way 


PHYSICAL  FACTORS  123 

of  freight  and  passenger  stations,  railroads  nowadays 
must  supply,  when  required,  a  great  many  special 
facilities  for  different  industries.  It  is  common  for 
the  leading  transportation  companies  to  own  their 
own  piers  and  docks  and  to  give  direct  wharfage  to 
steamship  lines  in  order  to  secure  their  business. 
These  dockage  facilities  are  in  some  cases  invaluable 
assets,  the  loss  of  which  would  mean  financial  ruin. 
Besides  piers  and  yards,  storage  facilities,  such  as 
elevators  and  warehouses,  must  likewise  be  sup- 
phed  when  required,  not  only  at  tide  water,  but 
also  at  interior  points.  These  facilities  are  frequently 
for  the  roads'  own  protection,  since  car  shortages 
may  be  caused  by  the  failure  of  shippers  or  of  con- 
necting steamship  companies  to  remove  freight  con- 
signed to  them.  In  addition  to  storage  conveniences, 
special  accommodations  must  be  provided  for  the 
transhipment  of  coal,  iron  ore,  and  other  bulky 
commodities  which  are  moved  in  large  enough  quan- 
tities to  furnish  a  motive  for  economical  handling. 
It  is  through  these  specialized  facilities  that  com- 
peting lines  arm  themselves  in  the  struggle  for  busi- 
ness, to  say  nothing  of  the  saving  in  operating  costs 
which  are  thereby  effected. 


■J 

CHAPTER  VI 

PHYSICAL  FACTORS  IN  ECONOMIC  OPERATION; 
RAILROAD   ROLLING   EQUIPMENT 

Improvement  in  the  character  of  rolling  stock  has 
been  coincident  with  improvement  of  roadbed  and 
superstructure.  Progress  along  these  lines  has  been 
so  rapid  that  it  is  exceedingly  diflScult  to  maintain 
a  satisfactory  standard  unit  for  measuring  railroad 
equipment  facilities.  Railroads  differ  as  to  their 
rolling  stock  to  an  even  greater  degree  than  in  track 
or  roadbed.  Moreover,  on  almost  all  railroad  sys- 
tems there  is  in  active  service  equipment  represent- 
ing the  different  types  in  the  progress  of  the  last  two 
generations.  As  one  type  becomes  obsolete  for  the 
highest  grade  service,  it  is  not  wholly  discarded 
though  relegated  to  an  inferior  use.^  One  of  the 
greatest  expenses  of  American  railroads  is  this  con- 
stant replacement  of  obsolete  equipment  to  meet 
the  public  demand  for  better  service. 

Locomotives.  In  view  of  the  steady  progress  in  the 
size  and  quality  of  railroad  equipment  a  mere  enum- 
eration of  the  locomotives  in  relation  to  the  volume 
of  traffic  is  no  index  to  adequacy  of  motive  power. 

*  Thus,  in  1910  the  locomotive  of  the  New  York  Central  Railroad, 
No.  999,  that  but  a  few  years  before  hauled  the  famous  Empire  State 
Express,  was  pulling  a  milk  train  in  Northern  New  York. 

124 


PHYSICAL  FACTORS  125 

A  pronounced  increase  in  the  size  of  engines  on  some 
railroad  systems,  though  resulting  in  numerical  re- 
duction, may  mean  a  larger  hauling  capacity  than  on 
another  system  possessing  a  greater  number  of  loco- 
motives. The  most  advanced  type  in  locomotive 
construction  (the  Mallet  articulated  compound  loco- 
motive) is  essentially  a  double  engine,  and,  because 
of  its  structural  advantages,  has  greater  power  than 
two  ordinary  single-expansion  type  locomotives. 

How  immensely  the  weight  of  a  locomotive  has 
increased  may  be  judged  from  the  fact  that  there 
are  now  in  use  engines  of  the  24-wheel  type,  weighing 
600,000  lbs.,  and  over.  When  the  first  bridge  was 
built  for  carrying  trains,  about  1835,  the  four-wheel 
grasshopper  type  of  engine  weighed  less  than  22,000 
lbs.  It  was  1873  before  a  consolidation  type  of 
locomotive  reached  the  weight  of  100,000  lbs.;  in 
1895  the  maximum  of  200,000  lbs.  was  reached. 
The  increase  above  400,000  lbs.  has  come  within 
the  new  century.  It  need  hardly  be  repeated  that 
roadbed,  rails  and  bridges  have  been  correspond- 
ingly strengthened  to  support  this  equipment. 

The  great  increase  in  the  size  of  locomotives  has 
largely  augmented  the  hauling  capacity  of  the  rail- 
roads, though  in  recent  years  the  number  of  locomo- 
tives built  has  been  less  than  formerly.  One  type 
of  engine  has  followed  another  so  rapidly,  with  con- 
stantly increasing  weights,  that  there  seems  to  be 
no  limit  to  the  possible  weight  of  a  locomotive. 
It  is  not  so  many  years  ago  that  this  weight  seemed 
to  be  restricted  because  the  permissible  weight  per 


126       AMERICAN  RAILROAD  ECONOMICS 

foot  of  track  was  necessarily  limited,  while  the  length 
appeared  to  be  limited  on  account  of  the  radii  of 
existing  curves.  The  appearance  of  the  Mallet  type, 
with  compound  articulated  boilers,  however,  per- 
mitted the  locomotive  to  be  elongated  beyond  what 
had  formerly  been  regarded  as  the  maximum.  Much 
of  the  growth  in  railroad  traffic  therefore,  has  been 
taken  care  of  by  larger  and  more  powerful  locomo- 
tives rather  than  an  increase  in  the  number  of  en- 
gines. 

Because  of  the  great  variety  of  locomotive  types 
railroad  motive  power  is  not  measured  by  available 
locomotives,  but  by  tractive  "power  pounds.  The 
tractive  power  is  the  final  pulling  force  that  the  en- 
gine is  capable  of  exerting.  It  is  defined  by  Welling- 
ton as  being  limited  by  the  percentage  of  adhesion 
to  the  track.  Motion  causes  slipping  which  reduces 
percentage  of  adhesion.  The  maximum  percentage 
of  adhesion  that  can  be  maintained  relative  to  weight 
on  driving  wheels  while  in  motion  is  the  total  tractive 
power.  Expressed  in  pounds  this  is  the  theoretical 
measure  of  locomotive  capacity  while  in  operation. 
It  is  dependent  on  the  locomotive  weight  on  the 
driving  wheels  and  on  the  boiler  and  cylinder  power 
of  the  engine. 

The  actual  capacity  of  a  locomotive,  however, 
depends  not  only  upon  its  size  but  also  upon  its 
efficiency  for  the  service  to  which  it  is  adapted.  In 
fast  passenger  service,  for  example,  the  efficiency 
test  occurs  when  the  locomotive  is  developing  a 
comparatively    low    tractive   force   at   high    speed. 


PHYSICAL  FACTORS  127 

Under  these  circumstances  the  hauling  power  de- 
pends primarily  on  the  steaming  capacity  of  the 
boiler,  and  not  upon  the  weight  carried  by  the  driv- 
ing wheels.  In  heavy,  slow  freight  service,  the  con- 
ditions are  different.  Here  the  test  comes  when  the 
locomotive  is  ascending  a  grade  at  slow  speed,  and 
developing  a  high  tractive  force.  The  ability  to  haul 
the  train  thus  depends  upon  the  weight  carried  on 
the  driving  wheels  as  well  as  upon  the  boiler  power, 
and  an  increase  in  hauling  capacity  can  be  secured 
only  by  enlarging  the  locomotive  and  placing  more 
weight  on  the  driving  wheels.  In  this  way  a  higher 
tractive  force  can  be  developed. 

Since  the  tractive  power  of  freight  locomotives, 
while  in  motion,  varies  with  the  percentage  of  ad- 
hesion of  the  driving  wheels  to  the  tracks,  the  align- 
ment of  the  roadbed  and  the  speed  required  by  the 
service  are  just  as  important  factors  in  determining 
the  required  hauling  power  of  locomotives  as  the 
volume  and  the  character  of  the  traffic.  Locomo- 
tives of  high  tractive  power,  such  as  the  Mallet 
compound  type,  maintain  their  pulling  force  near 
the  maximum  only  at  moderate  speed.  Hence, 
they  have  not  become  useful  for  passenger  and 
for  fast  freight  service.  Railroads  with  heavy 
grades,  and  the  coal  and  ore  carrying  roads  on  which 
speed  is  not  a  factor,  find  it  economical  to  use  large 
and  powerful  locomotives  of  the  Mallet  type.  The 
high  tractive  power  permits  large  train  loads  with- 
out the  inconvenience  and  expense  of  employing 
"helper"  locomotives,  or  "double  headers." 


128      AMERICAN  RAILROAD  ECONOMICS 

The  choice  of  locomotive  types  is  not  based  alone 
on  hauling  capacity  and  speed  efficiency.  Economies 
that  may  be  effected  in  fuel  and  in  maintenance 
cost  are  likewise  important  factors.  Thus,  on  one 
division  of  the  New  York  Central,  where  the  traffic 
consists  largely  of  coal,  consolidation  locomotives 
formerly  used  have  been  displaced  by  less  than  half 
the  number  of  Mallet  compound  engines  which 
handle  the  business  more  efficiently  with  a  saving  of 
35  per  cent,  in  fuel  consumption  per  mile.  Inasmuch 
as  these  matters  can  be  determined  only  by  actual 
test  and  experiment,  the  efficiency  of  the  railroad 
management  determines  in  each  case  the  proper 
selection  of  locomotive  types.  The  fundamental 
principle  of  sound  business  enterprise  demands  that 
the  equipment  should  be  neither  more  nor  less  than 
required  to  move  the  traffic  in  an  economical  and  effi- 
cient manner.    Anything  else  is  wasteful. 

On  American  railroads,  it  is  the  practice  to  give 
each  freight  locomotive  a  *' rating"  of  the  maximum 
tonnage  it  can  haul  over  a  stretch  of  line.  This 
rating  is  gauged  according  to  the  character  of  the 
freight,  the  speed  at  which  it  is  to  be  moved,  and 
the  prevailing  weather  conditions.  Locomotives 
therefore  can  be  so  distributed  for  use  over  a  railroad 
system  that  each  can  be  worked  to  full  capacity  while 
in  service.  The  locomotive  on  an  economically 
managed  road  is  expected  to  be  earning  money 
every  moment  that  it  is  not  in  the  hands  of  the 
roundhouse  or  of  the  repair  men. 

Although    enlargement    of    locomotive    tractive 


PHYSICAL  FACTORS  129 

power  has  been  rapid  in  recent  years,  the  weight  of 
the  modern  locomotive  cannot  advance  much  f mother 
except  at  the  expense  of  extensive  improvements  in 
alignment  and  track,  or  possibly  through  the  adop- 
tion of  an  arrangement  of  wheels  which  will  permit 
the  weight  to  be  much  more  widely  distributed  than 
at  present.  Taking  for  illustration  the  Mallet  type, 
which  is  now  acknowledged  as  best  suited  to  dense 
traffic,  it  may  properly  be  asked  how  far  may  this 
machine  be  made  more  efficient  by  other  means 
than  by  increase  in  size.  Further  contrivances  such 
as  compounding  cylinders  and  steam  superheaters, 
already  largely  in  use,  are  required  to  offset  the 
tendencies  toward  higher  wages  and  material  costs. 
All  these  matters  are  important  elements  in  profitable 
railroad  operations. 

Caxs.  The  difficulty  in  measuring  the  adequacy  of 
car  facilities  is  much  the  same  as  that  of  locomotive 
power.  Railroad  cars,  both  passenger  and  freight, 
even  when  separately  considered  in  classes,  differ  in 
original  cost  and  in  expense  of  upkeep  as  well  as 
in  size,  in  use,  and  in  durability.  Accordingly,  to 
compare  the  car  facilities  of  different  railroads  by  mere 
enumeration  of  each  class  {i.  e.,  box,  flat,  gondola, 
etc.),  frequently  leads  to  erroneous  conclusions.  No 
clue  is  given  to  the  ultimate  carrying  capacity.  By 
car  capacity  is  meant  the  amount,  in  terms  of  weight, 
that  can  be  loaded  into  a  freight  car  or  the  number 
of  passengers  that  can  be  seated  in  a  passenger  car. 
The  capacity  of  any  given  car,  therefore,  depends 
first,  on  the  strength  and  quality  of  the  car  and. 


130       AMERICAN  RAILROAD  ECONOMICS 

secondly,  on  the  character  of  the  traffic  for  which 
the  car  is  designed.  Thus,  heavy  and  dense  commod- 
ities, such  as  iron  ore,  coal  or  grain,  may  be  loaded 
to  the  full  marked  capacity  when  the  car  is  built  of 
strong  material,  whereas,  when  loaded  with  light 
and  bulky  articles  such  as  furniture,  the  same  car 
cannot  accommodate  one-third  of  the  weight.  More- 
over, certain  freight  because  of  the  extreme  size  of 
each  piece  {e,  ^.,  automobiles)  or  because  of  perish- 
ableness  {e.  g.,  fruits)  cannot  be  economically  loaded 
without  leaving  considerable  unoccupied  space.  A 
company  that  employs  cars  double  the  capacity  nec- 
essary for  the  class  of  goods  to  which  they  are 
adapted  is  as  uneconomical  as  one  that  uses  small, 
antiquated  and  broken-down  equipment  for  bulky 
and  dense  commodities.  Car  capacity,  therefore, 
when  apportioned  in  each  case  to  accommodate  the 
volume  of  the  different  classes  of  commodities  moved 
on  each  system,  is  an  important  element  in  efficient 
railroad  operation. 

The  growth  in  heavy  bulk  shipments  of  freight 
has  led  to  the  use  of  larger  and  stronger  cars.  The 
average  carrying  capacity  of  a  box  car  in  1871  was, 
approximately,  10  tons,  or  20,000  pounds.  Eight 
or  ten  years  later  a  movement  began  to  increase  the 
maximum  load  to  15  tons  and  even  to  20  tons. 
On  June  30,  1902,  according  to  the  returns  of  the 
Interstate  Commerce  Commission,  the  average  car- 
rying capacity  of  a  box  car  on  all  railroads  in  the 
United  States  was  27  tons.  In  1908  this  had  in- 
creased to  32  tons.     The  average  capacity  of  box 


PHYSICAL  FACTORS  131 

cars  in  1912  was  34  tons  or  more  than  three  times  as 
much  as  in  1871. 

The  same  growth  has  characterized  the  American 
passenger  car.  From  a  length  of  between  40  feet 
and  50  feet,  it  has  increased  to  75  feet  and  to  80 
feet,  and  with  the  increase  in  length  has  come  a 
more  than  corresponding  increase  of  weight.  The 
seating  capacity  of  an  ordinary  day  coach  70  feet 
long  is  about  88  passengers,  and  its  weight  is  about 
135,000  lbs. 

Improvements  in  the  materials  of  car  construction 
have  gone  hand  in  hand  with  enlarged  carrying  capa- 
city. The  old  wooden  box  car  is  fast  disappearing 
and  doubtless  some  day  will  be  as  little  used  as  the 
iron  rail.  Railroads  now  demand  all  steel  or  steel 
underframe  cars.  According  to  the  Railroad  Age 
Gazette,  88  per  cent,  of  the  freight  cars  built  in  the 
United  States  in  1910  were  of  steel  or  steel  under- 
frame  construction,  whereas,  in  1907,  these  were 
but  72  per  cent,  of  the  total.  The  figures  for  passen- 
ger car  construction  for  1911  show  that  909  all  steel 
cars  were  built;  619  were  built  with  steel  underframes 
and  1,010  were  of  wooden  construction.  The  proba- 
bility is  that  within  a  few  years  the  all  steel  pas- 
senger car  will  take  the  lead. 

The  primary  reason  for  using  steel  passenger  cars 
is  to  ensm-e  that  they  shall  stand  up  under  the  strains 
incidental  to  very  high  speeds.  High  speed  in- 
creases the  danger  to  life  and  limb  due  to  a  derail- 
ment. Steel  cars,  moreover,  minimize  the  dangers 
from  fire  in  wrecks  or  while  passing  through  tunnels. 


132      AMERICAN  RAILROAD  ECONOMICS 

The  use  of  steel  in  the  place  of  wood,  therefore,  may 
result  in  large  savings  to  the  railroads. 

The  use  of  heavier  materials  for  car  construction 
introduces  the  element  of  "dead  weight"  as  partly 
offsetting  economy  from  increased  car  capacity.  The 
common  passenger  car  has  been  made  larger  and 
stronger,  until  now  it  is  estimated  to  weigh  eleven 
times  as  much  as  the  passengers  it  carries.  This, 
however,  is  the  proportion  in  the  case  of  a  car  which 
is  fully  loaded.  But  on  the  luxurious  trains  on  which 
the  number  of  passengers  is  usually  not  over  100, 
the  passenger  weight  is  probably  not  more  than  one 
per  cent,  of  the  weight  of  the  car.  All  this  has  an 
important  bearing  on  operating  costs,  since  the  size 
and  tractive  power  of  locomotives  must  be  increased 
to  haul  the  extra  "dead  weight",  or  the  number  of 
cars  per  train  must  be  reduced. 

The  problem  of  increase  in  "dead  weight,"  is  also 
becoming  a  factor  in  freight  operations.  An  80,000 
pound  capacity  box  car  with  a  steel  underframe 
weighs  about  45,000  pounds,  whereas,  a  plain  wooden 
car  of  the  same  type  of  40,000  pounds  capacity, 
weighs  about  30,000  pounds.  Hence,  an  increase 
of  100  per  cent,  in  carrying  capacity  is  accompanied 
by  50  per  cent,  increase  in  "dead  weight."  How- 
ever, as  long  as  the  "dead  weight"  per  unit  ship- 
ment is  not  enlarged  in  the  same  ratio  as  the  carrying 
capacity  there  is  manifestly  a  direct  operating  econ- 
omy in  using  larger  and  stronger  cars,  provided  there 
is  tonnage  for  full  loading.  In  the  event,  however, 
that  "dead  weight"  outstrips  growth  in  carrying 


PHYSICAL  FACTORS  133 

capacity,  heavy  materials  for  car  construction  can 
be  economically  justified  only  on  the  ground  of 
greater  durability  and  smaller  upkeep  expense. 

Because  of  the  general  practice  in  railroad  opera-  , 
tions  of  inter-company  car  hiring,  considerable  prog- 
ress has  been  made  in  the  standardization  of  freight 
cars.  The  American  freight  car  is  a  wanderer  from 
home.  For  months,  and  even  for  years  at  a  time  it 
may  be  on  the  tracks  of  another  company,  journey- 
ing up  and  down  over  the  face  of  the  continent.  If 
it  breaks  down  while  thus  *' hired  out"  it  must  be 
repaired.  In  order  to  avoid  delay  the  repair  parts 
must  be  those  with  which  the  mechanics  on  all  lines 
are  familiar  and  which  can  be  readily  obtained.  The 
Master  Car  Builders'  Association,  which  controls 
the  practices  governing  the  interchange  of  cars,  has 
formulated  specifications  of  standard  parts  relating 
to  car  construction.  These  parts  include  journal- 
boxes,  brasses,  axles,  wheels,  brakeshoes,  safety  ap- 
pliances and  the  like,  adapted  to  various  types  and 
capacities  of  cars.  These  are  generally  used  by  all 
of  the  railroads  of  the  country.  The  wide  inter- 
change of  cars  that  is  practiced  becomes  possible 
only  by  their  strict  observance. 

To  have  a  supply  of  both  freight  and  passenger 
cars  on  hand  to  meet  the  maximum  traffic  demands 
at  all  times  is  an  exceedingly  important  factor  in  a 
railroad's  earning  capacity.  Aside  from  public  in- 
convenience, a  "car  shortage"  on  a  railroad  system 
implies  inefficiency  of  management  and  inability  to 
take  advantage  of  the  maximum  revenue  that  it  is 


134       AMERICAN  RAILROAD  ECONOMICS 

capable  of  receiving.  The  supply  and  the  capacity 
of  equipment  on  hand,  therefore,  is  an  item  de- 
serving careful  observation.  A  railroad  company 
which  is  compelled  to  use  an  unduly  large  proportion 
of  "hired"  equipment  may  have  a  temporary  ad- 
vantage, in  that  it  can  surrender  the  foreign  cars 
during  dull  seasons,  but  the  hiring  expense  and  the 
delays  encountered  before  the  equipment  can  be  re- 
turned frequently  over-balance  the  gain.  More- 
over, during  the  busy  season,  "foreign"  cars  are 
not  readily  obtainable,  unless  they  have  been  stored 
on  the  hiring  company's  side-tracks  in  anticipation 
of  the  demand.  During  this  time  the  per  diem  rental 
must  be  paid  on  the  idle  equipment.  To  prevent 
abuses  of  the  car  hire  privilege,  the  per  diem  rental 
rate  enforced  by  the  American  Railway  Association 
for  interchanged  freight  cars  was  increased  on  Janu- 
ary 1, 1913,  from  30c  and  35c  to  45c.  This  rental  is 
exclusive  of  certain  repair  expenses  which  are  charged 
to  the  hiring  company. 

The  question  of  adequate  and  proper  equipment 
in  connection  with  well  constructed  and  efficiently 
maintained  roadbed  and  superstructure  is  worthy 
of  careful  study  by  both  railroad  managers  and 
security  holders.  Data  of  this  sort  may  be  more 
indicative  of  financial  progress  and  investment  sta- 
bility than  the  figures  of  operating  revenues  and 
net  income. 


CHAPTER  VII 

TRA.FFIC   STATISTICS 

Passenger  and  Freight  Traffic.  The  distinctive 
traffic  feature  of  American  railroads  is  the  predomi- 
nance of  freight  over  passenger  business.  According  to 
latest  statistics  of  the  Interstate  Commerce  Commis- 
sion only  23  per  cent,  of  railroad  operating  revenues 
came  from  passengers,  whereas  more  than  68  per 
cent,  was  obtained  from  freight.  There  is  a  great 
divergence  from  this  proportion  on  some  of  the 
Eastern  lines.  The  New  York,  New  Haven  & 
Hartford,  the  New  York  Central,  the  Long  Island 
Railroad  and  others  having  a  large  suburban  business 
and  traversing  densely  populated  sections  have  a 
passenger  revenue  very  nearly  equal  to  or  in  excess  of 
freight  earnings.  Thus,  the  New  York,  New  Haven 
&  Hartford  passenger  revenue  for  the  fiscal  year  1911 
was  86  per  cent,  of  freight  revenue.  The  New  York 
Central,  for  the  same  year,  had  passenger  earnings 
approximately  31  per  cent,  of  the  total  operating 
revenues.  This  ratio  is  proportionately  greater  than 
on  the  Erie,  the  Baltimore  &  Ohio  and  the  Penn- 
sylvania. In  the  West  and  South,  railroads  depend 
very  little  on  passenger  business.  The  Union  Pacific 
passenger  earnings  for  the  five  years  ended  June  30, 
1913,   never  exceeded  25  per  cent,  of  gross  oper- 

135 


136       AMERICAN  RAILROAD  ECONOMICS 

ating  revenues,  and  on  the  Northern  Pacific  and 
the  Southern  Pacific  it  has  not  been  very  dif- 
ferent. 

The  economic  effects  of  these  disparities  in  the 
proportion  of  passenger  to  freight  earnings  should  not 
be  overlooked.  It  is  very  generally  conceded,  though 
difficult  of  practical  demonstration,  that  railroad 
passenger  traffic,  as  a  whole,  is  not  remunerative. 
Of  course,  the  railroad  systems  that  have  a  large 
passenger  business  may  gain  more  per  unit  of  passen- 
ger traffic  than  the  lines  whose  revenues  come  almost 
entirely  from  freight.  This  particularly  applies  to 
hues  having  facilities  adapted  to  large  passenger 
business,  for  then  the  traffic  is  one  of  "increasing 
returns,"  i.  e.,  the  total  cost  of  operation  increases 
in  less  proportion  than  the  increase  in  the  traffic 
units.  In  any  event,  as  long  as  the  revenue  obtained 
from  additional  passenger  traffic  covers  the  ex- 
penses caused  directly  by  this  new  business  (other 
things  being  equal),  no  loss  can  be  said  to  result  from 
increase  in  passenger  service.  However,  passenger 
rates  are  not  constructed  or  adjusted  after  the 
manner  of  freight  rates.  Hence,  railroad  systems 
having  dense  passenger  business  are  not  statistic- 
ally comparable  with  those  whose  operating  rev- 
enues are  derived  almost  exclusively  from  freight 
service. 

In  view  of  the  predominance  of  the  freight  business 
of  American  railroads,  our  attention  in  the  study  of 
traffic  statistics  shall  be  devoted  almost  exclusively 
to  this  class  of  transportation  service. 


TRAFFIC  STATISTICS  137 

Classification  of  Traffic  Statistics.  For  purposes  of 
analysis  traffic  statistics  may  be  grouped  under  two 
main  categories: 

1.  Those  indicating  the  nature  of  the  traffic,  i.  e.y 
the  volume  and  the  classes  of  freight  and  the  number 
and  kinds  of  passengers  carried. 

2.  Those  indicating  efficiency  and  economy  in 
conducting  the  transportation  service. 

THE  MEASUREMENT   OF   VOLUME  AND    CLASS  OF 
TRAFFIC 

Herein  are  included  all  data  dealing  with 

(a)  the  classes  and  kinds  of  commodities  carried, 
{h)  the   average  rate  received  for  each   and   all 
classes, 

(c)  the  average  density  of  the  traffic,  and 
{d)  the  average  distance  each  unit  is  conveyed. 
Obviously,  over  these  matters  the  railroad  mana- 
gers have  very  little  direct  control.  A  railroad  is 
compelled  to  accept  for  transportation  the  kind  of 
freight  offered  and  to  convey  this  freight  to  a  desig- 
nated station  on  its  lines,  or,  when  the  point  of 
destination  is  not  on  its  own  lines,  to  a  convenient 
transfer  station.  The  compensation  received  for 
each  class  and  kind  of  service  is,  as  we  have  already 
pointed  out,  determined  largely  by  competitive  and 
economic  forces.  Each  factor-^c/a55  of  commodity, 
weight,  length  of  haul,  and  rate — affects  earning  power. 
It  is  for  this  reason  that  the  details  of  these  factors 
are  so  carefully  collected  and  analyzed  and  that  the 
so-called  ^'ton-mile"  and  '^ passenger-mile''  statistics 


138      AMERICAN  RAILROAD  ECONOMICS 

have  been  developed.  The  resulting  data  are  alike 
useful  to  railroad  managers,  to  investors  and  to  the 
public.  "The  system  of  statistics  based  upon 
the  ton-mile  and  the  passenger-mile,"  says  a  British 
Parliamentary  Report,^  "takes  as  its  foundation 
the  principle  of  combining  in  a  comprehensive 
figure  the  two  factors  of  weight  or  number  and  of 
distance.  .  .  .  The  fundamental  units,  (the  ton- 
mile  and  the  ^passenger-mile)  being,  respectively, 
one  ton  carried  one  mile  or  one  passenger  carried  one 
mile." 

The  Ton-mile  Averages.  The  fundamental  traffic 
units  are  employed  as  averages.  It  is  the  charac- 
teristic of  the  average  to  give  no  information  of  the 
differences  and  disparities  of  the  individual  units 
on  which  it  is  based.  Almost  any  person  may  have  a 
fairly  definite  conception  of  what  is  meant  by  a  ton 
of  coal.  How  many  can  form  a  mental  composite 
picture  of  a  ton  of  meat,  a  ton  of  cotton,  a  ton  of 
salt,  a  ton  of  rice,  a  ton  of  sugar  and  a  ton  of  silk? 
The  ton-mile  gives  no  indication  of  the  classes  and  kinds 
of  commodities  carried,  the  character  of  the  service 
rendered  or  the  gross  receipts  and  rate  received  from  each 
class.  It  covers  all  kinds  of  traffic,  both  "through" 
and  "local,"  as  well  as  "high  grade"  and  "low 
grade."  One  railroad,  let  us  say,  has  a  large  fruit 
and  vegetable  traffic  which  it  hauls  all  the  way  from 
California  to  the  Atlantic  States.  Another  carries 
coal,  sand  and  iron  ore,  all  bulky  articles  that  are 

*  **  Accounts  and  Statistical  Returns  of  Railway  Companies," — Report 
of  the  Committee  Appointed  by  the  Board  of  Trade  (1909)  cd.  4697, 


TRAFFIC  STATISTICS  139 

hauled  but  a  short  distance.  In  the  first  case  the 
haul  is  long  and  the  rate  received  per  ton  is  high. 
In  the  second  case,  the  rate  is  low  and  the  haul  is 
short  not  only  because  a  high  standard  of  transporta- 
tion service  is  not  essential  but  also  because  the  large 
bulk  of  the  commodities  in  relation  to  their  low 
monetary  value  places  an  economic  maximum  limit 
on  the  freight  charge  that  enters  into  their  market 
price.  Accordingly,  in  every  summaried  statistical 
presentation  of  railroad  traffic  full  consideration  should 
be  given  to  the  relative  proportions  of  the  various  classes 
of  commodities  carried. 

Classification  of  Commodity  Traffic.  The  Inter- 
state Commerce  Commission,  for  a  number  of  years, 
has  classified  railroad  freight  tonnage  as.  Products 
of  Agriculture,  Products  of  Animals ,  Products  of 
Mines,  Products  of  Forests,  Manufactures,  Merchan- 
dise and  Miscellaneous.  This  classification  is  gen- 
erally followed  in  the  presentation  of  freight  com- 
modity statistics  in  railroad  reports.  With  the 
exception  of  merchandise,  the  classes  comprise  only 
carload  shipments.  It  is  evident  that,  although 
in  some  instances  the  requirements  of  a  general 
comparison  are  met  with  in  this  classification,  the 
wide  disparities  among  the  commodities  within 
each  class  preclude  a  correct  indication  of  the  real 
character  or  of  the  profitableness  of  the  group. 
Thus,  the  Atchison's  freight  traffic  consists  of  about 
22  per  cent,  in  agricultural  products,  of  which  fruit 
and  vegetables  are  about  one-fourth.  Measured 
by  receipts,  however,  and  probably  by  profits,  the 


140       AMERICAN  RAILROAD  ECONOMICS 

fruit  business  is  a  very  much  larger  proportion. 
Similarly,  dressed  meats  are  included  under  Products 
of  Animals,  along  with  live  stock,  hides,  bone  ferti- 
lizer and  the  like.  The  length  of  the  haul  as  well  as 
the  receipts  per  ton-mile  of  dressed  meats,  how- 
ever, is  far  in  excess  of  the  average  for  all  commod- 
ities in  the  group. 

Essential  to  correct  measurement  of  railroad 
traffic  is  a  knowledge  of  the  relative  proportions  of 
carload  and  less-than-carload  freight  Some  classes  of 
commodities  are  almost  uniformly  shipped  in  carload 
lots.  Many  other  commodities  are  generally  for- 
warded in  small  bulk  or  "less-than-carload'^  lots, 
(L.  C.  L.  freight).  The  consuming  capacity  of  the 
territory  traversed  frequently  determines  in  how  far 
a  railroad  company  can  enjoy  carload  lot  shipments. 
Accordingly,  two  railroad  systems  traversing  different 
localities,  though  carrying  the  same  proportions  of 
similar  commodities,  may  sustain  wide  differences  in 
the  average  rate  and  the  net  profit  received  from  the 
/  same  class  of  freight.  In  the  case  of  carload  ship- 
ments, the  freight  rate  on  a  ton-mile  basis,  largely 
,  because  of  economies  in  handling,  is  naturally  les3 
I  than  when  the  same  commodity  is  shipped  as  a 
less-than-carload  lot.  The  profit  on  carload  ship- 
ments to  the  railroad,  however,  may  be  relatively 
greater. 

No  important  railroad  system  as  yet  furnishes 
stockholders  data  regarding  the  proportion  or  the 
rate  per  ton-mile  of  each  class  of  commodity  shipped 
in  carload  lots.    The  Interstate  Commerce  Commis- 


TRAFFIC  STATISTICS  141 

sion,  however,  requires  in  the  official  annual  report 
filed  by  railroads,  a  statement  of  the  tonnage,  ton- 
mileage  and  revenue  from  certain  selected  com- 
modities transported  in  carload  lots.  Among  the 
commodities  selected  are  grain,  hay,  cotton,  live 
stock,  dressed  meats,  anthracite  coal,  bituminous 
coal  and  lumber.  This  data  pertaining  to  individual 
railroads  is  not  published,  but  the  original  report 
filed  by  each  company  with  the  Commission  is 
available  for  public  inspection  at  Washington. 

Diversification  of  TraflSc.  A  railroad  system  may 
be  largely  dependent  for  revenue  on  one  class  or  kind 
of  commodity,  or  it  may  have  a  diversified  traffic, 
L  e,y  one  class  of  freight  is  not  disproportionately 
large  or  small.  In  no  instance  does  each  class  of 
freight  bear  the  same  proportion  to  the  total  or  con- 
tribute alike  to  the  revenue.  Certain  commodities 
enter  more  largely  into  freight  movement  than 
others  not  only  by  reason  of  their  limited  areas  of 
production  and  widespread  demand  but  also  because 
transportation  is  an  essential  element  in  the  prepara- 
tion for  their  consumption.  Moreover,  raw  ma- 
terials and  bulky  articles,  such  as  mine  and  forest 
products,  naturally  tend  to  outweigh  lighter  prod- 
ucts. It  is,  therefore,  logical  that  mineral  prod- 
ucts make  up  more  than  one-half  of  the  total  freight 
movement  in  the  United  States.  It  must  be  re- 
membered, however,  that  the  average  distance  these 
bulky  products  are  hauled  is  comparatively  short. 
Their  importance  to  the  railroads,  therefore,  though 
undoubtedly  very  great,  is  unduly  emphasized  in  a 


142      AMERICAN  RAILROAD  ECONOMICS 

statement  showing  merely  the  percentage  that  each 
class  of  freight  bears  to  the  total  tonnage. 

A  diversified  tonnage  is  generally  considered  more 

i^  favorable  to  earning  stability  than  traffic  consisting 
almost  exclusively  of  one  commodity.  Yet,  the  con- 
struction and  development  of  many  leading  rail- 
road systems  has  been  due  to  the  large  revenue  af- 
forded by  some  important  commodity  requiring 
transportation  facilities  for  ultimate  consumption. 
Thus,  the  heavy  coal  tonnage  of  the  "Anthracite" 
and  the  "Bituminous"  roads,  and  the  "ore"  tonnage 
of  lines  from  Lake  Erie  to  Pittsburgh,  in  connection 
with  other  freight  movement,  furnishes  these  rail- 
roads a,  heavy  business  which  is  conducive  to  low 
operating  costs  per  traffic  unit.  Fluctuations  in  the 
predominant  item  of  tonnage,  however,  occasionally 
impair  the  earnings  of  these  companies.  Stability 
of  earning  power  is  ^  principal  source  of  financj_al__ 
security.  Hence,  every  railroad  management  aims 
to  acquire  as  diversified  tonnage  as  may  be  possible 
in  the  territory  traversed. 

A  further  disadvantage  of  lack  of  diversified  ton- 

*  nage  is  the  large  movement  of  traffic  in  one  direction. 
This  necessitates  the  extra  expense  of  the  "back 
haul"  of  empty  cars.  In  some  cases  a  "return  ton- 
nage" has  been  developed  to  offset  this  expense. 
Thus,  the  ore  carrying  lines  supplying  the  Pitts- 
burgh district  have  a  return  tonnage  of  coal  to  the 
lakes.  Similarly,  the  Delaware,  Lackawanna  & 
Western,  in  more  respects  than  one  a  "Road  of 
Anthracite,"  has  succeeded  in  building  up  a  large 


TRAFFIC  STATISTICS 


143 


fruit  traflSc  over  its  line  from  the  seaboard  to  interior 
points.  Even  though  this  equalization  of  traffic 
flow  may  not  eliminate  or  reduce  the  hauling  of 
empty  cars,  it,  at  least,  avoids  the  necessity  of  trains 
made  up  exclusively  of  "empties." 

The  effect  of  diversified  traffic  on  Eastern  lines 
in  reducing  the  percentage  of  empty  car  to  the  total 
car  movement  is  fairly  indicated  in  the  following 
table  compiled  from  returns  submitted  to  the  Inter- 
state Commerce  Commission  for  the  fiscal  years 
1910,  1911,  and  1912: 


Company 


Percentage  of 
empty  car  movement 
to  total  car  movement 


1912 


1911 


1910 


Philadelphia  &  Reading 

Central  Railroad  of  New  Jersey  .  .  . 

Norfolk  &  Western 

Chesapeake  &  Ohio 

Lehigh  Valley 

New  York  Central,  etc 

Erie  Railroad 

New  York,  New  Haven  &  Hartford 
Boston  &  Maine 


% 
37 
40 
40 
37 
33 
34 
31 
32 
28 


% 
38 
41 
41 
38 
31 
34 
30 
32 
21 


% 
40 
40 
39 
38 
32 
33 
29 
31 
27 


The  four  companies  reporting  the  highest  percent- 
age of  empty  car  movement  in  the  above  table  are 
those  which,  besides  having  a  large  coal  tonnage, 
have  no  special  facilities  for  interchange  of  through 
traffic  with  connecting  lines.  The  Erie  and  the 
Lehigh  are  both  "Anthracite"  lines,  but  the  Erie 


144      AMERICAN  RAILROAD  ECONOMICS 

is  also  a  trunk  line  from  Chicago  to  New  York  and 
the  Lehigh  has  an  arrangement  for  interchange  of 
through  traffic  with  the  Grand  Trunk  at  Buffalo. 
Traffic  interchange  affords  an  opportunity  for  di- 
versification of  tonnage  and  reduction  of  "empties." 
An  instance  of  improved  diversification  through 
gradual  change  in  the  relative  proportions  of  each 
class  of  freight  tonnage  is  furnished  by  the  Atchison, 
Topeka  and  Santa  Fe  System: 


Year  ended  June  30th 

Per  cent,  to  total  tonnage 

1901 

190^ 

1908 

1911 

1912 

Grain  Products 

% 
18.82 
12.05 
10.03 
30.94 

7.98 
20.18 

% 
16.46 
12.50 

8.99 
30.06 
12.28 
19.71 

% 

9.20 
13.68 

7.92 
32.05 
12.41 
24.74 

% 

7.50 
14.83 

7.74 
28.36 
11.11 
30.46 

% 
6.85 

Other  Agricultural  Products 

Products  of  Aniinals     

15.33 
7  33 

Products  of  Mines 

30.95 

Products  of  Forests 

10.24 

Manufactures  and  Merchandise  .  . 

29.30 

100.00 

100.00 

100.00 

100.00 

100.00 

Freight  receipts  per  ton-mile 

1.007c 

1.002c 

0.987c 

1.028c 

1.026c 

A  decade  ago  the  Atchison  was  classed  as  a  "granger" 
because  of  its  relatively  large  ratio  of  grain  tonnage. 
This  ratio  has  since  declined  more  than  60  per  cent. 
The  loss  in  grain  traffic  has  been  compensated  by  a 
gain  in  manufactured  products  (package  freight) 
which  is  usually  classed  as  "high  grade"  freight. 
The  effect  of  this  change  is  not  indicated  in  the 
average  receipts  per  ton-mile,   the  rate   1.007c  in 


TRAFFIC  STATISTICS  145 

1901  was  approximately  the  same  in  1912,  i.  e,, 
1.026c. 

Traffic  Density.  Large  tonnage  is  the  fundamental 
element  in  profitable  railroad  operations.  In  ac- 
cord with  the  economic  law  of  "increasing  returns," 
railroad  companies  having  their  lines  well  supplied 
with  traflSc  enjoy  relatively  lower  operating  costs 
than  lines  with  light  tonnage.  The  exception,  as 
already  pointed  out,  is  when  the  proper  facilities 
are  lacking  for  handling  and  moving  the  business. 
Traffic  expansion  in  volume  and  in  density,  however, 
has  been  generally  attended  by  corresponding  im- 
provements in  the  machinery  of  railroad  operation. 
Increasing  density  has  brought  larger  engines,  more 
capacious  cars  and  better  constructed  roadbed  and 
track.  In  other  words,  improvements  permit  the 
traffic  as  it  becomes  of  a  more  wholesale  character 
to  be  dealt  with  in  a  more  wholesale  and  therefore 
in  a  more  economical  manner.  If  this  cannot  be 
done,  the  advantages  of  heavier  traffic  may  be  en- 
tirely lost  to  the  railroad. 

The  measurement  of  traffic  volume,  or  traffic  den- 
sity, as  it  is  technically  known,  when  taken  in  rela- 
tion to  physical  factors  is  thus  of  the  highest  im- 
portance in  analyzing  operating  results.  Traffic 
density  is  ordinarily  computed  by  dividing  the  total 
ton-miles  by  the  miles  of  road  operated  in  a  railroad 
system.  Thus,  if  a  railroad  moved  1,000,000  tons 
of  freight  an  average  distance  per  ton  of  100  miles 
the  ton-mileage  would  amount  to  100,000,000  ton- 
miles.    If  the  total  length  of  line  operated  were  200 


N 


146       AMERICAN  RAILROAD  ECONOMICS 

miles,  then  the  freight  density  would  be  500,000 
ton-miles  per  mile  of  road.  Passenger  traffic  density 
is  measured  in  the  same  way.  It  is  the  quotient  of 
the  passenger-miles  divided  by  the  total  miles  oper- 
ated for  passenger  business.  These  items  are  at  IP 
best  crude  averages  for  indicating  the  extent  of  • 
the  railroad  business.  As  has  been  already  pointed 
out,  it  is  manifestly  impossible,  in  view  of  the  great 
variety  of  commodities  transported  and  the  com- 
plicated services  rendered  by  railroad  companies,  to 
assemble  in  a  single  average  the  record  of  actual 
work  performed.  Moreover,  the  handling  of  ton- 
nage in  increasing  bulk  is  not  necessarily  reflected 
in  increased  revenues  unless  the  proportion  of  the 
various  classes  of  commodities  remains  unchanged. 
Different  rates  are  received  for  transportation  of 
different  commodities.  However,  unless  there  has 
been  a  substantial  change  in  the  character  of  a  rail-  ^ 
road  company's  tonnage,  the  average  ton-miles-per- 
mile-of-line-operated  is  undoubtedly  the  best  index  of 
railroad  business.  Whether  this  progress  is  reflected 
in  increased  net  earnings  depends  on  the  adequacy 
of  the  physical  facilities,  the  operating  efficiency, 
and  the  retention  of  rates  and  charges. 

Average  Length  of  Haul.  Along  with  traffic  den- 
sity, the  average  haul  per  ton  is  an  influencing  item  in 
railroad  revenues  and  operating  costs.  It  is  obtained 
by  dividing  the  total  ton-miles  by  the  total  tonnage 
received  for  shipment.  If  railroad  services  were 
merely  confined  to  moving  commodities  in  carload 
lots  and  without  any  handling  at  terminals  or  with- 


TRAFFIC  STATISTICS  147 

out  other  service  than  the  mere  carriage,  the  varying 
length  of  the  average  haul  would  not  greatly  influ- 
ence operating  costs  or  freight  rates.    That  railroad 
^^rates  between  different  points  do  not  vary  directly 
"with  the  distance  is  due  almost  entirely  to  uniformity 
•  of  terminal  charges  regardless  of  the  haul.     Hence, 
it  fgllows  that  the  greater  the  average  haul  the  smaller 
proportionately  will  he  the  operating  costs  per  unit  of 
freight.    It  is  with  good  reason,  therefore,  that  the 
railroads  seek  to  obtain  business  insuring  a  long  haul 
even  though  the  rates  are  lower  than  on  short-haul 
tonnage. 

For  comparative  purposes,  and  as  a  factor  con- 
sidered separately  from  other  factors  influencing 
railroad  operating  results,  the  average  haul  is  of 
limited  statistical  value.  Some  commodities  are  of 
such  weight  and  bulk  in  relation  to  market  value 
that  to  convey  them  long  distances  entails  an  eco- 
nomic loss.  Included  among  this  class  are  the  basic 
materials  of  industry,  such  as  coal,  iron  ore,  and 
timber.  On  the  other  hand,  manufactured  articles 
of  small  bulk  and  high  price  may  be  moved  great 
distances  without  substantially  increasing  the  cost 
to  the  ultimate  consumer.  Consequently,  the  rail- 
roads carrying  a  large  proportion  of  this  high  grade 
tonnage  are  naturally  expected  to  have  a  longer 
average  haul  than  those  whose  tonnage  consists  chiefly 
of  low-grade,  bulky  articles.  This  result,  however, 
is  not  always  borne  out  in  the  yearly  fluctuation  of 
the  average  haul.  Changes  in  the  relative  propor- 
tions of  local  and  through  traffic  and  in  the  length 


148      AMERICAN  RAILROAD   ECONOMICS 

of  mileage  operated  as  well  as  in  the  character  of  .the 
freight  tonnage  are  factors  influencing  the  average 
haul  per  ton. 

A  further  limitation  to  the  use  of  the  average  haul 
for  comparative  purposes  is  the  differences  in  the 
length  of  railroad  companies'  lines.  Certainly,  it 
would  be  utterly  foolish  to  compare  the  average 
haul  of  a  trunk  line,  such  as  the  Pennsylvania  or 
the  Union  Pacific,  with  that  of  a  terminal  road  like 
the  Reading  or  the  Lackawanna.  The  former  carry 
large  tonnages  of  through  traffic,  whereas  the  latter, 
because  of  the  relatively  small  road  mileage,  are 
compelled  to  transfer  their  long  haul  tonnage  to 
connecting  lines.  It  cannot  be  too  greatly  empha- 
sized that  statistical  comparison  is  of  little  value 
unless  the  attendant  circumstances  are  taken  into 
account. 

In  considering  the  advantages  of  long-haul  traflSc, 
the  offsetting  effects  of  terminal  expenses  connected 
with  each  class  of  tonnage  should  be  kept  in  mind. 
These  charges  vary  not  only  as  to  commodities,  but 
also  as  to  manner  of  shipment.  Goods  shipped 
as  package  freight  entail  relatively  higher  handling 
costs  at  terminals  than  when  shipped  in  carload 
lots.  Moreover,  one  consignment  of  freight  may 
require  many  times  as  much  handling,  storage,  care 
and  insurance  as  another  consignment  of  equal 
weight  shipped  the  same  distance;  and  a  ton  of 
merchandise  shipped  to  twenty  different  places  is 
not  a  similar  "cost  of  service"  proposition  as  a  ton 
shipped  in  one  consignment,  though  the  railroad's 


TRAFFIC  STATISTICS  149 

revenue  in  each  case  may  be  approximately  the 
same. 

Diversity  of  freight  business;  growth  in  density  of 
freight  and  passenger  traffic;  and  increase  in  the  length 
of  haul  are  important  features  of  American  railroad 
progress.  They  are  factors  in  the  natural  course  of 
transportation  development.  The  extent  to  which 
the  railroads  have  participated  in  these  economic 
advantages  is  exceedingly  difficult  to  determine. 
One  of  the  questions  now  agitating  American  rail- 
road managers  is  how  to  retain  for  the  shareholders 
a  part  of  the  gains  of  progressive  transportation  de- 
velopment that  competition,  legislation  and  the 
demands  for  better  service  tend  to  eliminate.  One 
means  of  solving  this  problem  is  efficient  and  eco- 
nomical operation.  To  properly  gauge  the  attain- 
ments along  these  lines  requires  the  use  of  satisfac- 
tory statistical  units.  ^ 

STATISTICS   FOR   MEASURING  OPERATING  ECONOMY 
AND  EFFICIENCY 

These  widely  used  statistics  have  been  adopted  pri- 
marily to  assist  railroad  managers  in  the  intelligent 
operation  of  their  lines.  They,  however,  furnish 
information  of  the  service  given  to  the  public  as  well 
as  of  managerial  efficiency.  Railroad  rivalry  and 
competition,  and  the  necessity  of  maintaining  rail- 
road credit  to  provide  for  new  capital  requirements 
create  a  desire  on  the  part  of  operating  officials  to 
make  "a  good  showing."    In  this  way  the  standard 


150      AMERICAN  RAILROAD  ECONOMICS 

units  for  measuring  operating  costs  have  been  de- 
veloped. These  units  when  interpreted  properly 
become  an  effective  test  of  efficiency  as  well  as  a 
means  of  administrative  control. 

The  principal  standard  units  applied  in  the  meas- 
urement of  operating  efficiency  and  economy  are 
the  so-called  "mileage  costs."  These  comprise  de- 
ductions from  the  ton-mile  and  passenger-mile,  the 
locomotive-mile,  the  train-mile  and  the  car-mile  aver- 
ages. In  handling  these  standard  units,  or  in  using 
them  for  purposes  of  comparison,  extreme  caution 
is  essential.  Possible  changes  and  differences  in 
physical  facilities,  in  the  character  of  the  traffic 
and  in  managerial  policy  must  be  constantly  kept 
in  mind.  Even  within  the  same  railroad  system 
it  is  frequently  decidedly  unfair  to  measure  operating 
results  of  one  division  against  another  on  the  sole 
basis  of  "mileage"  averages.  Such  comparisons 
would  take  for  granted  similar  physical,  traffic,  labor 
and  climatic  conditions  as  well  as  similarity  in  meth- 
ods of  supervision  and  in  administrative  skill. 

It  is  not  our  purpose  in  this  work  to  analyze  in 
detail  the  numerous  averages  and  combinations  of 
standard  traffic  units  contained  in  railroad  and 
Government  reports.  Attention  shall  be  given 
merely  to  those  that  are  most  commonly  used  and 
serve  best  in  determining  relative  operating  effi- 
ciency. Among  the  principal  units  adapted  to 
this  purpose  are: 

(a)  the  Train-mile, 

(6)  the  Locomotive-mile, 


TRAFFIC  STATISTICS  151 

(c)  the  Car-mile, 

(d)  the  Average  Train-load, 

(e)  the  Average  Car-load. 

Each  of  these  will  be  considered  in  turn. 

Train-mile.  The  technical  conception  of  a  train- 
mile  is  the  movement  a  distance  of  one  mile  of  one 
or  more  locomotives  attached  to  any  number  of 
cars.  The  lack  of  definiteness  in  this  conception 
destroys  in  large  part  the  usefulness  generally  as- 
cribed to  the  train-mile  unit  in  establishing  a  com- 
parative basis  for  measuring  efficiency  and  operat- 
ing costs.  A  passenger  train  may  mean  everything 
from  a  creeping  branch-line  local  consisting  of  an 
antiquated  locomotive  and  a  haK-baggage,  half- 
passenger  coach  to  a  luxuriously  appointed  express 
of  a  dozen  or  more  steel  cars  moved  at  the  rate  of 
60  miles  an  hour.  Similarly,  a  freight  train  may 
connote  anything  from  a  box  car  behind  an  engine 
of  ancient  type  to  a  train  of  a  hundred  gigantic  steel 
cars  hauled  by  two  or  more  powerful  compound 
locomotives.  A  general  average  obtained  from  units 
of  such  varying  characteristics  is  essentially  defec- 
tive unless  modified  in  accordance  with  the  attend- 
ant circumstances  in  each  case. 

Having  in  view  the  lack  of  homogeneity  in  the 
train-mile,  the  term  cannot  correctly  be  applied 
unconditionally  as  a  cost  or  efficiency  index.  To 
say,  off  hand,  that  one  railroad  is  operated  more 
economically  than  another  because  its  freight  train- 
mileage  is  smaller  in  relation  to  the  total  ton-miles, 
or  because  it  has  smaller  operating  expenses  per 


152      AMERICAN  RAILROAD  ECONOMICS 

train-mile,  is  like  saying  that  a  brick  layer  accom- 
plishes more  work  than  a  stone  mason  because  in 
a  day's  work  more  bricks  than  granite  blocks  are 
placed  in  a  wall.  Obviously,  the  train-mile  will  serve 
as  a  unit  of  cost  and  of  eflficiency  only  when  there  is 
an  approximate  uniformity  in  the  units  from  which 
the  general  average  is  made,  i.  e,,  when  all  the  factors, 
such  as  the  class  of  commodities  carried;  the  kind 
and  capacity  of  cars;  and  the  number,  tractive  power 
and  speed  of  locomotives  are  proportioned  alike 
throughout  the  aggregations  from  which  the  arithme- 
tical averages  in  each  case  are  produced.  Moreover, 
railroads  compared  on  the  basis  of  train-mile  averages 
should  be  similar  in  physical  and  in  topographical 
characteristics  and  should  have  equal  supply  of 
rolling  stock  and  motive  power  in  relation  to  ton- 
nage and  traffic  density.  As  possible  comparisons 
under  such  circumstances  are,  to  say  the  least,  ex- 
ceedingly rare,  the  use  of  the  train-mile  unit  as  a 
basic  measurement  of  railroad  operating  efficiency 
and  economy  requires  the  utmost  caution. 

The  train-mile  unit,  in  spite  of  its  limitations  as  a 
statistical  average,  serves  an  important  function  in 
the  administrative  control  of  railroad  operations. 
In  fact,  railroad  transportation  essentially  consists  in 
buying  train-mileage  and  selling  ton-miles  and  pas- 
senger-miles. Therefore,  as  little  train-mileage  should 
be  purchased  as  is  economically  possible  in  relation 
to  the  traffic  units  sold.  A  manufacturer  or  mer- 
chant may  exceed  his  actual  needs  in  the  purchase 
of  goods  and  materials,  because  the  surplus  can  be 


TRAFFIC  STATISTICS  153 

stored  for  future  use.  The  railroad,  however,  that 
buys  more  train-mileage  at  a  given  time  than  is  ac- 
tually required  by  the  traffic  units  is  paying  for 
something  that  cannot  be  stored  and  that  is  irre- 
trievably lost.  Accordingly,  a  reduction  of  train- 
mileage  without  corresponding  decrease  in  the  ton- 
mileage,  all  other  factors  remaining  substantially 
unchanged,  is  evidence  of  more  economical  opera- 
tion. On  the  Erie  Railroad,  for  example,  the  revenue 
ton-miles  were  1,990,807  or  41  per  cent,  more  in  1911 
than  in  1899.  The  total  freight  train-mileage,  how- 
ever, decreased  in  the  same  period  from  15,277,747 
to  13,066,626,  or  14  per  cent.  Similarly,  on  the 
Burlington  the  freight  train-miles  (including  mixed 
train-miles)  decHned  from  19,314,987  in  1901  to 
17,554,338  in  1912,  or  a  decrease  of  9.1  per  cent. 
In  the  meantime,  however,  the  ton-miles  increased 
from  3,871,337,916  to  7,675,979,757  or  98.3  per  cent. 
In  other  words,  substantially  twice  the  freight  busi- 
ness of  1901  was  handled  by  the  Burlington  in  1912 
with  a  decrease  of  about  10  per  cent,  in  freight  train- 
miles.  Of  course,  these  results  have  been  pro- 
duced by  heavy  additional  capital  investment,  pos- 
sibly to  a  greater  extent  than  by  enhanced  operating 
efficiency.  Both  Erie's  and  Burlington's  locomo- 
tives have  become  larger;  grades  have  been  elimi- 
nated and  other  improvements  have  been  made  in 
order  to  increase  the  size  of  trains  and  thus  reduce 
the  train-miles.  To  understand  how  much  each 
factor  has  contributed  to  the  results  obtained  re- 
quires study  of  the  physical  improvements  as  well  as 


154       AMERICAN  RAILROAD  ECONOMICS 

an  analysis  of  the  average  train-load  and  other  stand- 
ard units  for  measuring  railroad  service  and  costs. 

The  Locomotive-mile.  As  a  statistical  average,  the 
same  limitations  are  applied  to  the  locomotive-mile 
as  to  the  train-mile.  The  varieties  of  locomotives 
in  kind  and  quality  almost  defy  classification.  Be- 
sides being  grouped  under  passenger,  freight  and 
switching  engines,  locomotives  may  be  single  ex- 
pansion Pacific  type;  consolidated  with  high  tractive 
or  with  low  tractive  power;  high-speed  Atlantic 
type  or  low-speed  articulated,  etc.  All  these  have 
different  hauling  power.  There  is  no  relative  uni- 
formity in  their  first  cost,  in  their  maintenance  or 
in  their  operating  expense.  To  be  of  practical  value 
in  indicating  cost  and  performance,  the  locomotive- 
mile  as  any  other  statistical  average  must  be  based 
on  a  homogeneous  aggregate.  This  would  require 
engines  to  be  of  the  same  general  type  and  class 
or  of  various  classes  equally  proportioned.  Even 
with  this  uniformity  the  influence  of  varying  fea- 
tures of  topography  and  roadbed,  such  as  grades, 
curves  and  the  like,  must  have  proper  consideration. 
There  is,  therefore,  under  existing  conditions  no 
uniform  relation  between  the  amount  of  work  per- 
formed and  the  cost  of  the  performance  in  the 
locomotive-mile  unit.  Considerable  adjustment  is 
obviously  required  before  this  standard  can  be  ac- 
cepted as  a  cost  or  as  an  efficiency  index. 

Inasmuch  as  locomotive  operating  costs  are  re- 
lated to  the  time  engines  are  employed  as  well  as  to 
the  actual  performance,  the  locomotive-hour  has  been 


TRAFFIC  STATISTICS  155 

suggested  as  an  index  preferable'  to  the  locomotive- 
mile.  The  tractive-power-hour,  i.  e,,  per-pound- 
tractive-power-per-locomotive-hour  as  a  standard  for 
measuring  both  cost  and  efficiency  of  performance 
has  been  recommended  by  a  committee  of  the  Asso- 
ciation of  Transportation  and  Car-Accounting  Offi- 
cers. The  employment  of  this  average  will  eliminate 
many  of  the  objections  applying  to  the  locomotive- 
mile,  since  the  basic  units,  i.  e.,  tractive-power  pound 
and  the  hour,  are  each  homogeneous  in  respect  to 
the  aggregates. 

The  Average  Car-mile.  Car-mileage  performance 
is  an  important  element  in  the  measurement  of 
efficiency.  As  a  statistical  standard  it  is  logically 
based  upon  the  actual  movement  of  the  cars  in 
service.  Thus,  the  calculation  of  the  average  mileage^ 
per  freight  car  would  be  the  quotient  of  the  actual 
mileage  covered  by  cars  in  use  divided  by  the  num- 
ber of  these  cars.  In  the  statistical  returns  of  rail4 
road  companies,  the  result  is  not  always  thus  cor- 
rectly obtained.  "^  In  the  first  place,  the  number  of 
car-units  used  in  the  computation  of  average  car- 
miles  may  be  those  owned  on  the  last  day  of  the 
month  or  year.  Secondly,  the  total  car-mileage 
includes  the  mileage  covered  by  hired  cars  as  well 
as  by  those  owned.  Now  it  is  very  likely  that  the 
number  of  cars  owned  and  in  service  on  the  last  day 
of  the  fiscal  year  is  not  the  same  as  the  "average" 
for  all  days.  Moreover,  the  number  of  rented  cars 
on  a  company's  lines  may  not  be  the  same  as  the 
number  of  cars  hired  to  other  railroads. 


156       AMERICAN  RAILROAD  ECONOMICS 

The  practical  defects  in  compiling  absolutely  cor- 
rect data  are  not  the  only  difficulties  hindering  the 
measurement  of  freight  car  service.  Disparities  in 
the  ratio  of  "empty"  to  loaded  car  mileage  directly 
affect  the  average  car  movement.  Car-capacity  and 
car-construction  are  also  essential  particulars  before 
an  equitable  basis  can  be  obtained  for  comparing 
freight  car  performance  as  between  different  rail- 
roads, or  on  the  same  system  at  different  periods 
of  time. 

Aside  from  these  difficulties,  there  is  a  further  arti- 
ficial limitation  arising  from  the  varying  demurrage 
regulations  prevailing  in  the  different  territorial  sec- 
tions. In  some  states  the  legal  period  allowed  for 
unloading  a  car  without  penalty  for  delay  is  forty- 
eight  hours,  and  in  others  it  is  as  high  as  seventy-two 
hours.  ^  Obviously,  the  longer  period  allowed  the 
greater  the  restriction  on  the  free  movement  of  cars 
in  service.  This  would  hinder  a  good  showing  in  car 
performance. 

After  summing  up  all  these  conditions,  it  is  quite 
conceivable  that  a  lower  average  car-mileage  per 
freight  car  on  one  line  may  represent  greater  operat- 
ing efficiency  and  economy  than  a  higher  average 
on  another  line  better  favored  by  conditions  promot- 
ing a  free  movement  and  a  maximum  use  of  cars. 

A  further  circumstance  limiting  the  performance 
of  both  passenger  and  freight  cars  is  the  irregularity 

^  Uniform  demurrage  rules  are  being  gradually  adopted  throughout 
the  United  States,  so  that  this  difficulty  in  the  equitable  measurement  of 
car  performance  is  being  eliminated. 


TRAFFIC  STATISTICS  157 

in  the  volume  of  traflSc  offered  to  some  railroads 
as  compared  with  others.  If  the  business  of  moving 
passengers  and  freight  came  uniformly  each  day, 
its  profitableness  to  the  railroads  would  be  greatly 
enhanced.  On  a  great  many  lines  equipment  must 
be  held  "idle"  for  many  days  in  order  to  be  in  readi- 
ness to  move  the  business  when  offered.  Grain, 
cotton  and  fruit  are  harvested  once  a  year  and  are 
forced  on  the  roads  for  movement  in  from  one  to 
four  months.  The  American  Railroad  Association's 
monthly  statistics  of  car  performance  occasionally 
show  disparities  of  40  per  cent,  or  more  in  the  ton- 
nage movement.  This  means  that  on  some  lines 
there  is  an  "idle"  period  for  a  large  part  of  the  car 
equipment,  and  when  these  "idle"  cars  are  used, 
they  are  frequently  handled  by  inefficient,  temporary 
employees. 

Owing  to  the  conditions  under  which  railroad 
operating  statistics  are  compiled,  and  the  complica- 
tions and  expense  incident  to  their  proper  prepara- 
tion, it  is  extremely  foolhardy  for  railroad  managers 
or  investors  to  rely  on  one  item  as  an  absolute  index 
of  efficiency  in  operation.  Because  of  the  great 
public  inconvenience  and  loss  from  "car  shortages," 
however,  freight  car  performance  statistics  are  care- 
fully studied.  The  American  Railway  Association, 
for  a  number  of  years,  has  been  collecting  and  pub- 
lishing general  data  of  this  sort.  The  public  is  now 
furnished  with  periodical  statements  of  the  loaded 
car  percentage  to  total  car  movement  and  with  data 
showing  available  car  supply.    There  are,  in  addition 


158      AMERICAN  RAILROAD  ECONOMICS 

statistics  of  actual  car  performance,  viz. :  the  average 
ton-miles  per  car  jper  day.  Comparative  statistical 
suiiimaries  are  published  from  time  to  time  by  the 
American  Railway  Association  so  that  both  the 
railroads  and  shippers  may  know  the  relative  prog- 
ress of  each  company  in  improved  car  efficiency. 

Average  Train-load.  As  a  basis  in  gauging  com- 
parative operating  efficiency,  the  average  train-load 
{i.  e.,  the  total  ton-miles  divided  by  the  total  train- 
miles)  presents  the  same  inherent  defects  as  are  en- 
countered in  ton-mile  costs.  A  line  with  heavy  grades 
must  necessarily  adjust  the  loading  to  the  Ijguling 
capacity  over  these  grades  or  undergo  the  use  of 
"pushers"  and  "double  headers."  This  practice  by 
some  companies  of  operating  many  trains  with  two 
or  more  locomotives  may  destroy  the  efficacy  of  the 
average  train-load  as  an  efficiency  index  since  it  alters 
the  relation  of  operating  costs  to  the  train's  tonnage. 

The  character  of  commodities  carried  is  also  of 
importance  as  an  influence  in  "maximum"  loading. 
A  train-load  of  silk  hauled  in  three  ordinary  box  cars 
will  bring  in  a  gross  revenue  probably  greater  than  a 
consignment  of  lumber  comprising  a  train  of  forty 
cars  and  having  a  net  weight  of  2,000,000  pounds. 
The  relative  proportion  of  car-load  and  less  than  car- 
load shipments  on  each  system  is  also  a  factor  in 
determining  the  average  train-load.  Car-load  con- 
signments are  computed  as  equal  in  weight  to  the 
marked  capacity  of  the  car  whether  under  or  over 
this  amount,  whereas,  package  freight  is  actually 
weighed  before  shipment.     It  frequently  happens 


TRAFFIC  STATISTICS  159 

that  shippers,  in  order  to  have  the  advantage  of  the 
lower  car-load  rate  will  hire  a  car  though  the  con- 
signment is  much  less  than  the  capacity  of  the  car. 
This  practice,  if  pronounced,  on  a  railroad  com- 
pany's lines,  produces  an  erroneous  statement  of 
the  average  train-load.  Moreover,  in  the  train-load 
computations  no  consideration  is  given  to  differences 
in  the  tare  or  "dead"  weight  of  cars.  The  weight 
of  cars  is  as  much  a  limitation  on  locomotive  tonnage-- 
rating  as  grades,  speed  and  air  temperature. 

Average  Car-load.  As  a  statistical  unit,  the  average 
car-load,  i,  e.,  average  tons  carried  per  loaded  freight 
car-mile,  is  in  the  same  category  as  the  average 
train-load.  The  disparities  in  the  quality  and 
carrying  capacity  of  cars  as  well  as  in  the  different 
classes  of  goods  carried  are  here  also  potent  factors 
affecting  the  validity  of  statistical  comparisons. 
However,  the  question  of  utilizing  car  capacity  to  the 
best  advantage  is  a  matter  of  general  importance  to 
the  public  as  well  as  to  railroad  officials  and  stock- 
holders. The  Committee  on  Car  Efficiency  of  The 
American  Railway  Association,  which  has  been 
investigating  the  problem,  has  adopted  as  the  best 
available  combination  unit  of  car  efficiency,  the 
ton-miles  hauled  per  freight  car  in  service  per  day. 
Their  statistics  indicate  that  this  item  is  steadily 
increasing.  The  largest  average  number  of  tons  hauled 
one  mile  per  car  per  day  in  1907  was  348;  the  largest  in 
1909,  413,  and  in  October,  1912,  434  ton-miles  per 
car  per  day.  An  interesting  problem  is  whether  this 
general   increase   has   been   secured   by  better  car 


160       AMERICAN  RAILROAD  ECONOMICS 

loading,  by  reduction  of  empty  car  mileage  or  by 
larger  carrying  capacity. 

In  view  of  the  constant  mcrease  in  size  of  cars, 
there  is  considerable  controversy  as  to  whether  the 
average  loading  in  recent  years  has  kept  pace  with 
the  increased  average  carrying  capacity.  In  1910,  as 
compared  with  1902,  freight- ton  mileage  increased 
59  per  cent.,  total  car-capacity  69  per  cent.,  and  total 
car-mileage  41  per  cent.,  while  the  increase  in  the 
average  tons  moved  jper  loaded  freight-car-mile  was 
from  16.9  tons  in  1902  to  19.8  tons  in  1910,  an 
increase  of  less  than  18  per  cent.  This  either  reflects 
a  lowering  of  car  efficiency  or  an  increase  in  the 
average  car-capacity  beyond  the  limits  warranted  by 
traffic  conditions.  Actual  tests  on  several  roads 
(more  particularly  the  Erie  and  the  Lackawanna) 
seem  to  demonstrate  that  with  the  development  of 
package  freight  shipments  and  the  demand  for  fast 
freight  service,  cars  are  frequently  moved  with  loads 
less  than  one-half  of  their  capacity. 

Train  Frequency  and  Speed.  The  highest  operat- 
ing economy  manifestly  implies  that  each  locomotive 
and  each  car  on  every  line  shall,  during  a  given 
time,  move  the  maximum  number  of  tons  with 
proper  expedition  and  at  a  minimum  expense.  To 
accomplish  this  requires,  (aside  from  perfect  manage- 
rial skill),  an  abundance  of  traffic  and  a  good  roadbed, 
weU  maintained  and  adequately  equipped  with 
motive  power  and  rolling  stock.  If  the  volume  of 
traffic  at  each  point  is  not  commensurate  with 
equipment    capacity,    heavy    car-loads    and    train- 


TRAFFIC  STATISTICS  161 

loads  may  be  directly  opposed  to  speed  and  train 
frequency.  The  character  of  transportation  service, 
therefore,  demands  consideration  in  estimates  of 
operating  efficiency  and  economy.  Though  good 
railroad  management  decrees  the  handling  of  traffic 
at  the  lowest  operating  costs,  business  requires  that 
it  be  handled  speedily.  To  satisfy  the  public  demand 
the  best  railroads  maintain  time  schedules  in  freight 
as  well  as  in  passenger  service.  In  some  cases  actual 
tests  have  demonstrated  that  "time"  freight  trains 
are  handled  more  economically  in  relation  to  revenue 
than  the  "tonnage"  trains. 

The  leading  railroad  systems  in  the  United  States 
operate  on  the  principle  that  it  is  not  economical  to 
have  the  locomotives  haul  the  maximum  load  at  the 
minimum  speed.  Delays  caused  by  "loading" 
equal  to  the  locomotive  capacity  frequently  result  in 
greater  loss  than  gain.  The  same  number  of  cars 
and  locomotives  when  loaded  lightly  so  as  to  make 
speed  may  handle  considerably  more  freight  in  a 
given  period  of  time  than  when  '*held  up"  at  stations 
and  division  points  awaiting  a  full  load.  Besides, 
loading  at  or  near  to  the  maximum  hauling  capacity 
of  the  locomotive  enhances  the  liability  to  locomotive 
break-downs.  It  is  a  well  known  fact  that  changes  in 
temperature  and  other  climatic  conditions  alter 
train-resistance.^  The  resistance  offered  by  railroad 
trains  is  greater  in  cold  weather  than  it  is  under 

^  See  University  of  Illinois  Bulletin,  No.  59.  "The  eflFeets  of  cold 
weather  upon  train  resistance  and  tonnage  rating,"  by  Ed.  C.  Schmidt 
and  F.  W.  Marquis. 


162       AMERICAN  RAILROAD  ECONOMICS 

ordinary  temperatures.  Recognition  of  this  fact 
has  led  to  the  reduction  of  "tonnage  ratings," 
(i.  e,,  the  maximum  loading)  of  locomotives  during 
cold  weather.  This  practice  is  almost  universal 
among  railroads  in  the  northern  part  of  the  United 
States  and  in  Canada.  Any  study  of  economical 
train  loading,  therefore,  should  recognize  the  fac- 
tor of  air  temperature  as  well  as  of  speed  and  of 
train  frequency. 

Conclusion.  It  is  such  factors  as  the  foregoing  that 
make  the  proper  interpretation  of  statistical  units 
measuring  operating  efficiency  a  most  complicated 
and  difficult  task.  Satisfactory  results  cannot  be 
obtained  merely  by  study  of  the  bare  statistics.  The 
operating  conditions  must  be  thoroughly  known 
before  safe  conclusions  can  be  drawn.  It  is  apparent, 
therefore,  that  the  testing  of  railroad  economy  and 
efficiency  through  the  use  of  selected  statistical  units 
requires  the  greatest  caution.  There  are  so  many 
diverse  factors  and  attendant  circumstances  which 
destroy  or  impair  the  efficacy  of  the  different  units. 
To  illustrate:  An  attempt  is  made  to  measure 
progress  in  locomotive-efficiency  by  a  year  to  year 
comparison  of  tons  hauled  per  locomotive-mile.  This, 
however,  is  found  unsatisfactory  because  no  account 
is  taken  of  the  changes  in  the  size  and  tractive  power 
of  the  locomotives.  A  comparison  is  then  made 
on  the  basis  of  ton-miles  moved  per  pound  of  locomotive 
tractive-power.  But  this  gives  no  consideration  to 
changes  in  the  character  or  in  the  density  of  freight 


TRAFFIC  STATISTICS  163 

traffic.  A  further  analysis  based  on  the  combination 
of  units  which  gives  consideration  to  the  time  each 
locomotive  was  in  use  {locomotive-hours)  and  to 
fluctuations  in  volume  of  traffic  {ton-miles  per  mile  of 
road)  must  be  made.  There  may  be  further  objec- 
tions, however.  The  relative  supply  of  locomotives 
and  rolling  stock  may  have  varied  at  different  periods. 
These  are  contributory  elements  in  measuring 
efficiency.  Moreover,  the  progressive  improvement 
in  alignment  and  in  superstructure  of  roadbed  places 
each  year  on  an  unequal  comparative  basis.  Were 
railroad  operations  subject  to  purely  static  instead 
of  highly  dynamic  conditions  the  measure  of  efficiency 
and  economy  through  the  use  of  unrefined  traffic 
statistics  would  be  an  easy  matter. 

When  it  comes  to  a  comparison  of  the  operating 
efficiency  of  different  railroad  systems  on  the  basis 
of  statistical  averages,  the  liability  to  erroneous 
conclusions  demands  full  consideration  of  all  factors 
influencing  operations.  The  St.  Louis  &  San  Fran- 
cisco Railroad  and  the  Chicago,  Rock  Island  & 
Pacific,  though  not  altogether  similar  in  geographical 
location  of  lines  and  in  traffic  conditions,  afford  an 
interesting  statistical  comparison.  The  'Frisco 
serves  Kansas,  Missouri,  Arkansas,  Tennessee  and 
Oklahoma,  and  taps  Texas.  The  Rock  Island  has 
its  lines  for  the  most  part  west  and  north  of  Chicago, 
covering  Minnesota,  Iowa,  Missouri,  Kansas,  Colo- 
rado and  Oklahoma.  It  also  has  a  line  reaching  the 
Mexican  border  in  New  Mexico  and  another  which 
runs  from  Oklahoma  into  Arkansas  and  Louisiana. 


164      AMERICAN  RAILROAD  ECONOMICS 

Thus,  the  two  companies  cover  partly  the  same 
geographical  regions,  though  the  'Frisco  has  no 
through  line  corresponding  to  that  of  the  Rock  Island 
running  between  Chicago  and  Denver  and  north 
thereof.  The  average  mileage  operated  by  the 
'Frisco  exclusive  of  the  Chicago  &  Eastern  Illinois, 
during  the  fiscal  year  1911,  was  5,188  miles  as 
against  the  Chicago,  Rock  Island  &  Pacific's  8,026 
miles. 

As  far  as  division  of  revenue  is  concerned,  the  Rock 
Island  and  the  'Frisco  are  much  alike.  Sixty-seven 
per  cent,  of  gross  revenue  came  from  freight  on  the 
'Frisco,  compared  with  63.3  per  cent,  from  freight 
on  the  Rock  Island.  Freight  density  is  also  much  the 
same  on  both  roads.  In  1911  the  average  ton-miles 
per  mile  of  road  on  the  'Frisco  amounted  to  515,754, 
and  on  the  Rock  Island  to  587,890.  The  average 
revenue  per  ton-mile  on  the  'Frisco,  in  1911  was 
1.05  cents,  an  increase  of  .7  of  a  mill  over  1910.  The 
revenue  per  ton  per  mile  on  the  Rock  Island  is  some- 
what lower,  in  1911  averaging  9.2  mills. 

As  might  be  expected,  the  'Frisco,  not  having  any 
long  through  route  comparable  to  the  Rock  Island's 
main  line  from  Chicago  to  Denver  gets  a  much  shorter 
average  haul  of  freight.  This  average  haul  in  1911  was 
156.21  miles  on  the  'Frisco  and  246.80  miles  on  the 
Rock  Island.  However,  a  greater  proportion  of  the 
'Frisco's  traffic  consists  of  "low  grade,"  bulky 
materials  than  is  the  case  with  the  Rock  Island  and 
to  this  may  be  due  in  part  its  shorter  average  haul. 
In  1911,  Produxis  of  Mines  and  of  Forests  comprised 


TRAFFIC  STATISTICS 


165 


57.96   per   cent,    of    'Frisco's    tonnage   as   against 
41.05  per  cent,  of  the  Rock  Island's.^ 
Tkain-Mile  Averages 


Year  ended  June  30th, 


Freight  Density 

Average  Revenue  Train-load .... 
Revenue  per  Freight  Train-mile 
Freight  train-miles  per   mile  of 
road 


Rock  Island 


1911         1910 


587.890 
269.66 
$2,479 

2.096 


567.792 
257.43 

$2,380 

2.110 


St.  Louis  & 
San  Francisco 


1911 


515.754 
220.93 

$2,318 

2.245 


1910 


557.886 
222.91 

$2,178 

2.429 


Since  the  ratio  of  freight  revenue  to  total  operating 
revenue  is  much  the  same  on  both  roads,  and  since 
traffic  density  is  also  not  widely  different,  the  forego- 
ing statistical  comparison  of  train-mile  and  locomotive- 
mile  averages  is  interesting  and  requires  careful  study. 

^  The  following  table  shows  the  percentage  of  the  tonnage  of  each  class 
of  commodity  to  the  total  tonnage  carried  by  each  company. 


Rock  Island 

St.  Louis  & 
San  Francisco 

Per  cent,  of 

total  freight 

1911 

1910 

1911 

1910 

Products  of  Agriculture 

Products  of  Animals.  .  . 

% 
25.88 

7.68 
29.46 
11.59 
18.41 

6.57 
.41 

% 
22.13 

7.08 
31.93 
12.34 
19.55 

6.46 
.50 

% 
16.31 

4.02 
38.57 
19.39 
15.75 

5.35 
.61 

% 
14.80 
3.47 

Products  of  Mines 

40.41 

Products  of  Forests 

20.72 

Manufactures 

15.44 

Merchandise  * 

4.94 

Miscellaneous 

.22 

Total 

100.00 

100.00 

100.00 

100.00 

*  Represents  all  less  than  car-load  shipments. 


166      AMERICAN  RAILROAD  ECONOMICS 

The  figures  call  for  interpretation.  The  Rock 
Island's  density  of  traffic  in  1911  was  587.890  ton- 
miles  or  approximately  14  per  cent,  greater  than 
the  'Frisco's.  Rock  Island's  freight  train-miles 
per  mile  of  road,  however,  was  6  per  cent.  less.  This 
economic  advantage  of  the  Rock  Island  is  accounted 
for  by  the  heavier  average  train-load  (i.  e.  the  number 
of  tons  per  train-mile)  which  in  1911  was  48.73  tons 
or  22  per  cent,  greater  than  'Frisco's  average  train- 
load.  The  Rock  Island's  heavier  train-load  is  ob- 
tained with  a  smaller  proportion  of  bulky  freight,  as 
shown  on  the  preceding  page.  Smaller  proportion  of 
low  grade  tonnage  naturally  has  resulted  in  slightly 
larger  revenue  per  freight  train-mile,  since  Rock 
Island  in  1911  received  an  average  of  $2,479  against 
$2,318  received  by  the  'Frisco  as  freight  revenue 
for  each  freight  train-mile.  It  appears,  therefore, 
that  the  Rock  Island  has  an  economic  advantage 
over  its  sister  road  in  that  it  is  enabled  to  handle  its 
tonnage  in  a  more  wholesale  manner,  receiving  at  the 
same  time  a  larger  revenue  per  train-mile, 

A  comparison  of  locomotive  performance,  however, 
such  as  is  shown  on  the  opposite  page,  is  necessary  to 
substantiate  this  conclusion. 

It  should  be  observed  that  although  the  Rock 
Island  handles  more  tonnage  per  locomotive-mile 
than  the  'Frisco  the  average  locomotive  tractive  power 
of  the  former  is  the  greater.  This  excess  in  average 
locomotive  capacity,  however,  is  relatively  slight. 
In  1911,  the  ton-miles  per  freight  locomotive-mile 
on  the  Rock  Island  was  319.7  against  267.5  on  the 


TRAFFIC  STATISTICS 

Locomotive-Mile  Averages 

167 

Year  ended  June  30th 

Rock  Island 

St.  Louis  & 
San  Francisco 

1911 

1910 

1911 

1910 

Total  ton-miles  per  freight  loco- 
motive mile  ^.  .  .  . 

319.7 

27,622 

27,770 
38.89c 

299.8 

26,690 

30.500 
35.88c 

267.5 

26,864 

28,190 
35.49c 

269.4 

Average  tractive  power  per  loco- 
motive (lbs.) 

25,927 

Average  locomotive-miles  per  lo- 
comotive  

29,520 

Expenses  per  locomotive-mile.  .  . 

35.69c 

'Frisco,  an  advantage  of  approximately  25  per  cent. 
The  Rock  Island's  average  tractive  power  per  locomo- 
tive, however,  exceeded  that  of  the  'Frisco  by  less 
than  3  per  cent.  At  this  point  in  our  analysis  of 
locomotive  performance  we  must  logically  conclude 
that  the  results  on  the  Rock  Island  indicate  greater 
operating  efficiency.  But  the  miles  run  by  each 
locomotive  (average  locomotive-miles  per  locomotive) 
is  an  important  factor.  In  1911  the  Rock  Island  in 
this  respect  fell  slightly  behind  the  'Frisco,  though  in 
the  previous  year  it  was  ahead,  having  30,500 
against  'Frisco's  29,520  locomotive-miles  per  locomo- 
tive. In  computing  this  item  however,  the  average 
locomotives  in  service  is  assumed  to  be  the  number 
at  the  end  of  the  year  less  one-half  of  the  increase 
(or  plus  half  the  decrease)  over  the  number  at  the 
year's  beginning.  This  computation  may  introduce 
an  element  of  error.    New  locomotives  may  be  put 

*  Includes  company  "non-revenue"  freight. 


168      AMERICAN  RAILROAD  ECONOMICS 

into  service  and  old  ones  withdrawn  either  at  the 
beginning  or  at  the  end  of  the  year  and  not  gradually 
throughout  the  period  as  is  assumed  in  the  statistical 
comparison. 

An  important  factor  of  locomotive  efficiency  is  the 
operating  cost  in  relation  to  the  work  done.  In  the 
table  it  is  shown  that  the  cost  per  locomotive-mile  on 
both  roads  in  the  year  1910  was,  approximately,  the 
same  notwithstanding  Rock  Island's  larger  ton- 
mileage  per  locomotive-mile.  In  1911,  however,  the 
operating  cost  per  locomotive-mile  on  the  Rock  Island 
was  38.89c.  compared  with  35.69c.  on  the  'Frisco. 
Thus,  the  Rock  Island's  advantage  in  operating 
efficiency  as  exhibited  in  the  train-mile  and  locomotive- 
mile  averages  is  impaired  to  some  extent  by  the  rise  in 
the  locomotive  operating  cost  per  mile-run  in  1911. 
This  may  indicate  that  efficiency  is  acquired  through 
sacrifice  of  economy. 


CHAPTER  VIII 

INTERSTATE     COMMERCE     COMMISSION'S     SYSTEM     OF 
RAILROAD   ACCOUNTS 

Classification  of  Railroad  Financial  Data.  The 
portion  of  a  railroad  report  containing  the  financial 
data  can  be  separated  into  three  divisions  repre- 
sented by  (1)  the  Income  Account  (2)  the  Profit  & 
Loss  {or  Surplus)  Account,  and  (3)  the  General  Bal- 
ance SJieet,  These  three  parts  are  co-related  and 
interdependent.  Changes  in  one  are  generally  re- 
flected in  either  or  both  of  the  other  two.  The  In- 
come Account  and  the  Profit  &  Loss  Account  have  to 
do,  respectively,  with  operation  and  with  proprietor- 
ship. By  proprietorship  is  meant  the  net  gain  (or 
loss)  in  the  corporation  other  than  that  represented 
by  the  nominal  investment. 

The  data  of  operation  {L  e.,  the  Income  Account) 
show  how  the  periodical  profits  or  losses  were  ar- 
rived at.  The  Profit  &  Loss  Account  shows  the  dis- 
tribution of  these  net  profits  and  the  part  thereof 
that  remains  in  the  business  as  a  surplus.  The 
General  Balarwe  Sheet,  on  the  other  hand,  is  a  state- 
ment of  financial  condition.  It  shows  on  a  given 
date,  in  summarized  form,  the  resources  or  assets 
and  the  offsetting  liabilities  or  claims.  Among  the 
liabilities  are  included  the  Profit  &  Loss,  and  other 


170      AMERICAN  RAILROAD  ECONOMICS 

items  representing  net  "proprietorship).  The  inclusion 
of  the  net  proprietorship  among  the  liabilities  forms 
the  connecting  link  between  the  Income  Account  and 
the  General  Balance  Sheet.  Thus,  the  Income  Ac- 
count exhibits  the  financial  operations  producing  the 
clear  gain  or  loss  of  the  company's  operations  dur- 
ing a  definite  period.  This  gain  or  loss  may  be  di- 
rectly taken  up  by  the  proprietors  (^.  e»,  the  stock- 
holders), or  it  may  be  transferred  in  whole  or  in  part 
to  the  Profit  ^  Loss  Account,  In  the  latter  event, 
the  net  proprietorship  of  the  corporation  is  increased 
if  profits  are  added,  and  decreased  if  losses  are  de- 
ducted. A  corresponding  change,  therefore,  results 
in  the  General  Balance  Sheet,  The  Profit  &  Loss,  or 
Surplus,  as  it  is  commonly  called,  is  thus  the  ac- 
count for  recording  the  net  financial  change  wrought 
by  past  operations  on  the  present  condition  of  the  cor- 
poration. It  completes  the  summary  of  the  General 
Balance  Sheet  as  an  exhibit  of  financial  condition. 
In  the  words  of  Prof.  Wm.  M.  Colei^ 

Only  the  balance  sheet  represents  the  present  condition,  whereas,  the 
income  sheet  represents  the  transactions  which  produced  that  condition, 
but  ceased  to  have  independence  as  soon  as  they  were  completed. 

It  is  for  this  reason  that  all  financial  transactions 
which  are  entered  only  in  the  Income  Account  are 
said  to  be  ''charged  to  income"  as  distinguished  from 
transactions  which  are  entered  in  the  General  Balance 
Sheet  (either  directly  or  through  the  Profit  &  Loss 
Account),  which  are  said  to  be  "charged  to  capital." 

^"Accounts,  Their  Construction  and  Interpretation,"  by  Wm. 
Morse  Cole,  p.  71. 


RAILROAD  ACCOUNTS  171 

An  expenditure  "charged  to  income"  does  not  be- 
come a  part  of  the  assets  or  of  'proprietorship.  Hence, 
none  of  the  items  of  the  General  Balance  Sheet  are 
in  any  way  affected.  An  expenditure  charged  to 
Profit  iSc  Loss,  however,  affects  net  proprietorship, 
and  reduces  this  item  in  the  General  Balance  Sheet, 
The  transaction  is,  therefore,  reflected  in  the  ex- 
hibit of  financial  condition.  Similarly,  an  expendi- 
ture which  is  made  directly  for  the  purpose  of  in- 
creasing assets  or  reducing  liabilities,  and  which  is 
not  recorded  among  the  data  of  operation,  is  a 
"charge  against  capital."  The  transaction  may  be 
recorded  in  one  or  more  items  among  the  assets  and 
in  one  or  more  items  among  the  liabilities. 

With  this  brief  resume  of  fundamental  account- 
ing principles,  we  shall  proceed  to  a  study  of  the 
prevailing  system  of  railroad  accounts  as  affecting 
the  interests  of  investors  and  of  the  public. 

In  tracing  the  affairs  and  transactions  of  American 
railroad  companies,  "outsiders"  have  a  less  difficult 
task  than  in  an  analysis  of  other  business  enter- 
prises. In  railroad  operations  there  is  a  standardiza- 
tion and  uniformity  of  accounting  methods  that 
insures  an  intelligible  presentation  of  financial  re- 
turns. The  20th  section  of  the  Interstate  Commerce 
Act,  approved  June  29,  1906,  authorized  the  Inter- 
state Commerce  Commission  to  prescribe  and  super- 
vise a  uniform  system  of  accounting  for  each  class  of 
interstate  common  carriers.  Beginning  with  the 
year  ended  June  30,   1908,   a  uniform  accounting 


172      AMERICAN  RAILROAD  ECONOMICS 

system  was  installed  for  interstate  railroad  com- 
panies. The  Interstate  Commerce  Commission's 
agents  have  legal  authority  to  inspect  railroad  ac- 
counts and  records. 

Previous  to  the  enforcement  of  a  uniform  account- 
ing system  the  leading  railroad  systems  had  followed 
similar  methods  of  bookkeeping.  Uniformity  was 
not  compulsory,  however,  and  departure  from  stand- 
ard practice  was  permitted.  Each  railroad  was  at 
liberty  to  follow  its  own  system  without  regard  to 
the  rights  and  interests  of  the  public  or  of  any  class 
of  security  holders.  Occasional  receiverships  when 
large  profits  and  equities  were  reported  were  due 
to  lax  accounting  methods. 

The  Underlying  Motives  of  the  Interstate  Com- 
merce Commission's  Accounting  System.  In  draft- 
ing a  system  of  railroad  accounts,  two  motives  appear 
to  have  actuated  the  Interstate  Commerce  Commis- 
sion. The  first  was  the  desire  to  know  actual  operat-v/ 
ing  costs  so  as  to  have  a  basis  of  equitable  rate  mak- 
ing. Cost  data,  to  be  authentic  and  incontrovertible, 
require  the  keeping  of  accounts  in  a  prescribed  and 
uniform  manner,  and  their  publication  in  accurate 
and  intelligent  form.  The  second  motive  back  ofv^ 
the  uniform  accounting  system  is  the  desire  for 
reliable  statistical  information  correctly  portraying 
the  financial  status  and  fiscal  operations  of  the  great 
transportation  agencies.  This  probably  more  than 
any  other  consideration  guided  the  Commission  in  its 
constructive  v/ork  in  providing  a  prescribed  system 
of  accounts. 


RAILROAD  ACCOUNTS  173 

The  statistical  purpose  underlying  the  control  of 
railroad  accounts  is  undoubtedly  closely  related  to 
and  interwoven  with  the  need  of  an  authentic  basis 
for  correct  statement  of  operating  expenses.  With- 
out uniformity  of  accounts  for  all  carriers  of  the 
same  class,  and  without  means  of  detecting  false 
and  misleading  returns,  it  is  very  unlikely  that  fair 
and  correct  statements  of  the  financial  condition  and 
operating  results  of  the  carriers  as  a  whole  can  be 
obtained.  Moreover,  the  publication  of  misleading 
or  inadequate  statistics  by  a  governmental  agency 
possessing  the  authority  and  prestige  of  the  Inter- 
state Commerce  Commission  accomplishes  no  useful 
purpose  and  may  result  in  pubHc  injury.  On  the 
other  hand,  the  systematization  of  railroad  accounts 
so  as  to  meet  the  demand  for  clear  and  intelligent 
statistics  should  entail  neither  sacrifice  nor  violation 
of  the  principles  upon  which  modern  business  ac- 
counting is  based.  When  there  are  no  conflicts  of 
this  character  the  accounts  of  transportation  agen- 
cies can  be  readily  and  safely  adjusted  to  serve 
statistical  purposes.  In  this  respect  their  value  as 
public  records  is  greatly  enhanced. 

Principal  Accoimting  Regulations.  The  controlling 
motives  of  the  Interstate  Commerce  Commission 
produced  a  system  of  railroad  accounts  designed 
more  to  meet  the  broader  and  comprehensive  require- 
ments of  public  regulation  than  to  specifically  serve 
the  purposes  and  desires  of  railroad  managers  and 
security  holders.  The  aim  to  have  the  operating 
costs  serve  as  a  rate  making  basis  led  to  rigid  regu- 


174      AMERICAN  RAILROAD  ECONOMICS 

lations  in  certain  accounting  details  which  previously 
had  been  dealt  with  independently  in  accordance 
with  the  individual  financial  policy  of  each  railroad. 
Important  among  these  regulations  are: 

(1)  The  absolute  separation  of  rail  transportation 
operations  from  ancillary  operations. 

(2)  The  exclusion  of  taxes  from  among  the  direct 
costs  of  operation. 

(3)  The  establishment  of  joint  facilities  accounts 
on  a  uniform  basis. 

(4)  The  inclusion  of  depreciation  charges  as  a 
direct  operating  expense. 

(5)  Rigid  classification  of  improvement  and  bet- 
terment expenditures. 

(6)  Uniform  practice  in  crediting  premiums  re- 
ceived and  charging  discounts  paid  in  the  sale  of 
capital  securities. 

(7)  Strict  regulations  regarding  losses  from  the 
abandonment  of  physical  property. 

The  enforcement  of  these  regulations  prescribed 
with  a  view  to  determining  actual  operating  costs 
has  met  with  some  serious  criticism  and  complaint 
on  the  part  of  railroad  managers.  Regarding  the 
first  three  items  there  was  little  objection,  although 
the  resulting  bookkeeping  adjustments  entailed 
many  difficulties.  It  is  well  known  that  railroads 
are  engaged  directly  in  a  number  of  operations 
other  than  transportation  by  rail.  For  the  most 
part,  these  operations  are  intimately  connected  with 
or  are  ancillary  to  the  business  of  transporting  pas- 
sengers and  freight.    The  revenue  as  well  as  the  ex- 


RAILROAD  ACCOUNTS  175 

pense  incident  to  them  nevertheless  is  sufficiently 
distinct  from  the  revenues  and  expenses  which  ac- 
crue on  account  of  rail  transportation  to  permit 
separate  accounting.  This  distinction  has  led  to 
the  recognition  of  a  class  of  accounts  designated  as 
*^  Outside  Operations,^'  They  cover  the  operations 
of  harbor  terminals,  ferries,  elevators,  electric  hght 
and  power  plants,  stock  yards  and  the  like.  The 
motive  for  requiring  a  separate  set  of  accounts  for 
this  class  of  activities  is  expressed  in  the  following 
official  definition  for  ''Outside  Operations:" 

Outside  operations  are  facilities  operated  or  services  rendered  by  a  rail- 
road other  than  those  incidental  to  transportation  by  rail,  the  revenues 
and  expenses  of  which,  if  included  in  the  carrier's  accounts  dealing  with 
transportation  by  rail,  would  impair  the  significance  of  statistics  pre- 
pared from  such  accounts. 

Joint  Facilities  Accounts.  A  similar  motive  under- 
lies the  requirement  of  Joint  Facilities  Accounts 
on  a  uniform  basis.  It  is  the  common  practice  of 
railroads  to  use  jointly  with  other  companies  certain 
physical  facilities  such  as  terminals,  tracks,  bridges 
and  the  hke.  The  Joint  Facilities  Accounts  are 
provided  in  order  to  ascertain  the  operating  expenses 
of  each  company  without  reference  to  any  service 
rendered  by  it  to  another  carrier  or  to  any  service 
rendered  by  another  carrier  to  it.  In  other  words, 
the  participation  of  any  railroad  in  the  operations  of 
another  may  by  means  of  the  Joint  Facilities  Accounts 
be  so  shown  that  a  combined  statement  of  the  oper- 
ating expenses  of  all  carriers  would  represent  neither 
more  nor  less  than  their  true  expenses  of  operation. 


176      AMERICAN  RAILROAD  ECONOMICS 

Thus,  the  Joint  Facilities  Accounts  debar  a  railroad 
from  including  in  its  transportation  earnings  certain 
revenues  which  are  not  derived  directly  from  the 
public  for  transportation  or  for  kindred  service. 
They  also  prevent  the  inclusion  among  operating 
'  expenses  of  payments  for  the  use  of  capital.  Thus, 
rental  paid  for  a  track  which  is  maintained  and 
operated  at  the  expense  of  the  lessee  represents 
merely  a  payment  for  the  use  of  the  property.  This 
rent  is  not  affected  in  any  manner  by  the  various 
acts  of  operation.  It  is  not,  therefore,  an  operating 
expense.  According  to  accounting  principles,  rentals 
are  expenses  similar  to  interest  and  taxes  when  the 
full  amount  of  the  payments  represent  merely  the 
reward  for  the  use  of  capital.  Frequently,  however, 
rental  payments  cover  costs  of  upkeep,  deprecia- 
tion, wages  of  employees,  etc.  All  this  requires  a 
distribution  of  the  revenues  and  expenses  arising 
from  joint  facihties  in  a  uniform  manner  over  the 
various  accounts  of  each  company  so  as  to  properly 
show  how  much  represents  operating  activities  and 
how  much  represents  receipts  and  payment  for  the 
use  of  capital. 

Enforced  Maintenance  of  Depreciation  Accounts. 
The  Commission's  rulings  regarding  the  maintenance 
of  depreciation  accounts  were  promulgated  with 
special  reference  to  railroad  cost  accounting.  Their 
enforcement  brought  forth  the  most  determined 
opposition.  Among  those  active  in  protesting 
against  the  keeping  of  depreciation  accounts  were  the 
largest,     best-equipped    and    most    conservatively 


RAILROAD  ACCOUNTS  177 

managed  railroad  companies.  Some  of  these  claimed 
that  the  renewals  and  repairs  to  their  equipment 
were  made  at  a  rate  which  tended  to  maintain  the 
property  at  a  uniform  standard  of  efficiency  at  all 
times.  Accordingly,  there  was  no  necessity  for 
depreciation  accounts  on  their  books.  A  number  of 
other  railroads,  including  the  Pennsylvania,  the 
New  York  Central  and  the  Norfolk  &  Western, 
provided  for  depreciation  of  equipment  largely 
through  sinking  fund  charges  on  their  equipment 
obligations.  Probably  in  no  two  important  railroad 
systems  were  the  methods  of  treating  depreciation 
charges  identical.  Depreciation  accounts,  similar 
to  reserve  and  sinking  fund  accounts,  are  not  neces- 
sarily entries  of  actual  and  tangible  transactions, 
but  are  mere  records  of  provisions  for  current  and 
prospective  losses.  The  money  value  of  the  provi- 
sions must,  therefore,  be  estimated.  The  estimates, 
however,  are  largely  based  on  experience,  and  the 
railroad  managers  contend  that  they  are  capable  of 
attending  properly  to  such  matters.^ 

Classification  of  Additions  and  Betterments.  In 
its  classification  of  additions  and  betterments,  the 
Commission  directed  a  blow  against  the  creation  of 
hidden  assets  by  the  railroads  and  the  concealment 
of  profits  through  inflation  of  current  operating  ex- 
penses. A  number  of  American  railroads  had  gone 
beyond  the  recognized  principle  of  charging  operating 

^  The  railroads  at  the  present  writing  are  required  to  keep  depreciation 
accounts  only  with  respect  to  their  rolling  equipment.  With  respect  to 
other  property  the  matter  is  optional  with  the  companies. 


178      AMERICAN  RAILROAD  ECONOMICS 

expenses  with  only  the  cost  of  such  improvements 
and  betterments  as  do  not  produce  revenue.  By- 
charging  productive  improvements  to  operation, 
they  have  actually  increased  their  capital  assets 
through  current  income  without  having  a  perma- 
nent record  thereof  on  their  books.  The  continua- 
tion of  this  practice  under  the  Interstate  Commerce 
Commission's  control  would  seriously  impair  the 
value  of  railroad  accounts  as  a  gauge  of  actual 
operating  costs.  The  Commission,  therefore,  in 
distinguishing  between  expenditures  "chargeable  to 
capital"  and  expenditures  "chargeable  to  income," 
applied  a  rigid  rule  for  all  the  railroads  regard- 
less of  their  varying  traffic  conditions  and  financial 
policies. 

In  rail  replacements,  for  example,  the  Commission 
has  ordered  that  when  heavier  rails  than  those  re- 
placed are  put  down,  the  difference  in  cost  arising 
from  additional  weight  is  a  capital  expense  and 
must  not  be  charged  against  operating  revenues. 
On  the  Philadelphia  &  Reading  Railroad,  this  ruling 
resulted  during  the  year  1910  in  an  addition  of 
$158,976  to  property  account,  which  in  previous 
years  would  have  been  included  in  maintenance 
charges. 

Thus,  the  prescribed  rule  in  replacements  and 
renewals  permits  operating  expense  to  be  charged 
only  with  the  cost  of  the  original  structure  replaced. 
Many  experienced  railroad  officers,  however,  claim 
that  in  all  such  cases  operating  expenses  should  be 
charged  with  the  full  amount  necessary  to  preserve 


RAILROAD  ACCOUNTS  179 

earning  efficiency.  They  point  out  that  by  reason 
of  the  larger,  heavier,  more  frequent  and  more  luxu- 
rious service  called  for  by  modern  traffic,  together 
with  the  keen  competition  among  the  railroads  and 
the  demand  of  the  shippers  and  traveling  public 
for  better  facilities,  it  is  vitally  necessary  to  charge 
to  operating  expenses  all  extra  charges  required  to 
preserve  the  railroad  in  the  same  general  earning 
status, as  it  was  before.  In  other  words,  since  rail- 
road facilities  are  constantly  improved  and  in- 
creased to  preserve  earning  capacity  the  necessary 
expenses  for  doing  this  must  be  met  in  part  at  least 
from  revenue. 

Railroad  improvements  may  be  roughly  divided  * 
into  two  classes — those  which  increase  the  earning 
capacity  in  proportion  to  their  cost,  and  those  which 
do  not.  To  the  latter  class  belong  the  handsome  and 
expensive  passenger  terminals  which  the  cities  are 
demanding.  A  new  passenger  station  at  Kansas 
City  costs  $2,000,000.  A  station  fully  serving  the 
needs  of  the  public  could  be  built  for  $200,000. 
Thus,  nine-tenths  of  the  expenditure  is  to  appease 
the  aesthetic  ambition  of  the  local  citizens.  Only 
one-tenth  is  to  increase  earning  capacity.  It  is  fre- 
quently the  same  with  expenditure  for  track  eleva- 
tion in  cities.  This  promotes  public  safety  and  con- 
venience. It  also  tends  to  reduce  operating  expenses. 
The  cost,  however,  in  most  cases  greatly  exceeds  the 
purely  economic  benefits  gained  by  the  railroad. 
Financiers  contend  that  these  improvements  should 
be  paid  for  at  least  partly  by  charges  to  operating 


180      AMERICAN  RAILROAD  ECONOMICS 

expenses  as  well  as  from  the  surplus  earnings  or 
from  the  sale  of  securities.^ 

Commissions  and  Discotints  Paid  or  Premiums  Re- 
ceived from  Sale  of  Securities.  Railroad  financiers 
and  managers  have  also  criticised  oflficial  regulations 
regarding  commissions  and  discounts  paid  or  pre- 
miums received  in  connection  with  the  sale  of  securi- 
ties. Commissions  and  discounts,  when  paid  in 
connection  with  stock  issues  are  required  to  be  car- 
ried on  the  books  as  a  "permanently  deferred  asset" 
until  the  stock  sold  is  returned  or  converted,  or  until 
the  discount  is  extinguished  by  premiums  realized 
on  subsequent  sales  of  the  same  class  of  stock.  "If 
the  stock  is  retired  or  converted,  the  discount  is 
then  a  charge  against  Profit  &  Loss  or  against  the 
premium  realized,  if  any,  at  the  date  of  such  retire- 
ment or  conversion."    In  other  words,  such  discount 

^  The  question  of  railroad  betterments  and  depreciation  is  also  under 
discussion  in  Great  Britain.  The  Committee  of  the  Board  of  Trade 
appointed  to  inquire  into  the  matter  unanimously  agreed  that  the  man- 
agement of  each  company  should  be  permitted  to  de(^de  what  expenses 
were  mere  maintenance  and  what  were  betterments.  Mr.  W.  M.  Ac- 
worth,  who  was  a  member  of  the  Board  of  Trade  Committee,  re- 
marks: 

"  We  come  then  to  the  conclusion  that  all  interests,  the  interest  alike 
of  the  public  and  of  the  shareholders,  are  best  served  by  charging  freely, 
not  mere  repairs  and  renewals  (i.  e.,  depreciation),  against  the  annual 
income,  but  also  substantial  sums  for  additions  and  improvements,  and, 
further,  for  what  perhaps  might  be  described  as  contingencies.  In  other 
words,  the  real  test  of  what  part  of  the  gross  income  is  net  income  is,  not 
whether  the  physical  corpus  of  the  property  has  been  adequately  kept 
up,  but  whether  the  earning  power  of  the  undertaking  as  a  whole  is  being 
maintained."  See  "Railroad  Accounting  in  America  vs.  England," 
North  American  Review,  March,  1910. 


RAILROAD  ACCOUNTS  181 

may  not  be  charged  against  income,  though  this 
policy  is  in  line  with  correct  accounting  principles. 
In  the  case  of  the  sale  of  bonds  or  other  form  of 
funded  obligations,  the  Commission  requires  that 
"the  discount,  unless  extinguished  by  premiums  ex- 
isting on  previous  bond  sales,  should  be  charged  to 
income  in  such  equal  annual  installments  during 
the  life  of  the  bonds  as  will  extinguish  the  discount." 
The  carrier  may,  however,  at  its  option,  charge  to 
Profit  &  Loss  all  of  the  discount  or  any  part  of  it 
remaining  at  any  time  unextinguished,  but  the  charge 
to  income  in  any  one  year  must  not  exceed  the  amount 
of  the  annual  installment  applicable  to  that  year.  A 
similar  regulation  exists  regarding  the  periodical 
crediting  of  premiums  received  in  bond  sales.  The 
ostensible  purpose  of  this  ruling  is  to  have  each  year 
bear  proportionately  the  regularly  recurring  costs 
for  the  use  of  capital.  Discounts  and  premiums  on 
bonds  are  held  to  be,  respectively,  an  addition  to  or 
a  deduction  from  the  rate  of  interest  paid  for  loans. 
This  theory  underlies  the  separation  of  discounts 
and  commissions  when  paid  in  connection  with  capi- 
tal stock  from  the  same  items  in  connection  with 
bond  issues.  Funded  indebtedness  is  nominally  re- 
deemable after  a  fixed  period  during  which  the  dis- 
count is  amortized,  whereas,  capital  stock  is  a  per- 
petual obligation.  Under  the  prevailing  system  of 
railroad  capitalization,  however,  funded  indebted- 
ness is  essentially  as  permanent  as  capital  stock. 
None  of  the  great  railroads  make  full  provision  in 
advance  for  bond  liquidation.    Maturing  bonds  are 


182      AMERICAN  RAILROAD  ECONOMICS 

usually  substituted  by  new  issues.^  The  discount  or 
premium  at  which  railroad  securities  are  sold  fre- 
quently can  be  arbitrarily  determined  by  the  rail- 
road management.  It  is  largely  dependent  on  the 
rate  of  interest  they  attach  to  such  obligations,  as 
well  as  on  prevailing  money  market  conditions  and 
the  credit  status  of  the  railroad  company.  More- 
over, it  is  frequently  discretionary  with  railroad 
financiers  whether  stock  or  bonds  shall  be  sold  to 
obtain  new  capital. 

Losses  on  Account  of  Abandonment  of  Property. 
The  method  of  accounting  for  the  losses  occasioned 
by  abandonment  of  railroad  property  is  one  of  the 
most  serious  of  the  technical  problems  in  connection 
with  the  Interstate  Commerce  Commission's  uni- 
form system  of  accounts.  According  to  a  report  of 
the  Commission: 

On  the  part  of  the  public,  the  argument  is  strong  in  support  of  the 
proposition  that  the  Balance  Sheet  statement  of  "Cost  of  Property" 
should  cover  only  that  property  actually  used  in  rendering  the  service  of 
transportation,  and  that  abandoned  property  should  therefore  be  taken 
out  of  the  accounts;  but  the  argument  of  the  stockholder  also  has  merit, 
which  is  that  inasmuch  as  the  property  abandoned  was  abandoned  to 
make  way  for  providing  the  public  with  better  facilities,  and  further,  in- 
asmuch as  the  first  investment  was  necessary  in  order  that  the  second 
investment  might  be  made,  it  is  scarcely  just  to  require  the  stockholder 
to  sustain  the  entire  loss.  A  sense  of  equity  and  an  appreciation  of  busi- 
ness conditions,  rather  than  legal  or  accounting  technicalities,  would 
seem  to  be  the  element  out  of  which  such  a  policy  should  be  constructed.^ 

The  definite  expression  of  the  Commission's  policy 
is  contained  in  the  following  paragraph  of  the  Clas- 

'  This  is  discussed  in  greater  detail  in  Chapter  XII. 
«  "Statistics  of  Railways,"  1907,  p.  20. 


RAILROAD  ACCOUNTS  183 

sification  of  Additions   c&  Betterments,    (1st  revised 
issue),  p.  15: 

Property  Retired  and  not  Replaced.  When  property  (other  than 
equipment),  an  addition  to  or  a  betterment  of  which  would  be  chargeable 
to  the  accounts  of  this  classification,  is  abandoned  or  withdrawn  from 
service  and  not  replaced,  the  cost  (estimated,  if  not  known)  should  be 
credited  to  the  account  provided  for  such  property;  proper  account 
should  be  taken  of  any  salvage;  the  reserve  accounts  for  abandoned  and 
accrued  depreciation  should  be  debited  with  the  amounts,  if  any,  pre- 
viously credited  thereto  with  respect  to  the  property  abandoned  or  with- 
drawn, and  the  difference  between  the  salvage  plus  the  reserves  and  the  cost 
should  be  charged  to  Profit  and  Loss  to  which  should  also  be  charged  any 
incidental  expenses  connected  with  the  retirement. 

The  Bulletin  further  provides: 

If  any  unit  of  property  the  cost  of  which  is  less  than  $200  is  abandoned 
and  not  replaced,  the  option  may  be  exercised  (unless  the  accounts 
covering  such  property  are  specifically  excepted  from  this  option)  of 
making  no  credit  entry  with  respect  to  such  abandonment. 

The  foregoing  provisions  are  restricted  to  property 
retired  or  abandoned  directly  in  the  process  of  im- 
provement. Abandonment  incidental  to  improve- 
ments or  from  other  causes  is  held  to  be  a  loss  charge- 
able entirely  to  current  earnings.  An  exception  is 
made  when  the  aggregate  amount  of  such  loss  in 
any  one  year  should  "unduly  burden  the  accounts." 
In  the  latter  event,  after  consent  of  the  Commission, 
a  portion  of  the  loss  may  be  "carried  forward  as  a 
periodical  charge  against  the  earnings  of  subsequent 
years."  The  annual  amount  is  to  be  determined  in 
advance  by  agreement  with  the  Interstate  Com- 
merce Commission. 

The  practical  diflSculties  arising  from  the  "aban- 
doned property"  rulings  are  well  illustrated  in  a 


184      AMERICAN  RAILROAD  ECONOMICS 

legal  dispute  of  the  Kansas  City  Southern  Railroad 
with  the  Interstate  Commerce  Commission.  In 
1909,  the  Kansas  City  Southern  issued  $10,000,000 
bonds,  out  of  the  proceeds  of  which  $1,250,000  was 
set  aside  for  the  reduction  of  grades.  It  was  found 
cheaper  at  some  points  to  build  sections  over  new 
routes  and  to  abandon  the  old  sections  rather  than 
to  raise  or  lower  the  old  tracks  at  those  points.  The 
latter  method  would  have  cost  $1,230,319,  but  by 
putting  in  new  sections  at  six  points  the  expense 
was  reduced  to  $629,400.  The  sections  abandoned 
were  discarded,  "not  because  they  were  out  of  repair 
or  worn  out  or  obsolete,  but  merely  as  an  incident 
to  the  most  economical  method  of  effecting  the 
improvement." 

The  regulations  of  the  Commission  required  that 
from  the  cost  of  the  improvements  should  be  deducted 
the  estimated  value  of  the  property  abandoned — 
namely,  $491,121 — and  that  this  amount  (less  salv- 
age) should  be  entered  as  operating  expense.  "The 
injustice  and  absurdity  of  these  regulations,"  says 
the  brief  in  this  case,  "are  clear  from  the  fact  that 
had  the  improvements  been  made  on  the  original 
roadway,  the  regulations  of  the  Commission,  with- 
out any  of  this  chaotic  confusion,  would  have  per- 
mitted and  required  that  the  entire  expenditure  be 
added  to  the  property  accounts,  and  no  sum  what- 
ever would  have  been  charged  to  operating  ex- 
penses." 

Further  accounting  rulings  of  the  Commission 
have  been  criticised  as  being  opposed  to  railroad 


RAILROAD  ACCOUNTS  185 

interests.  It  has  been  claimed  that  the  accounting 
orders  of  the  Commission  go  beyond  the  formulation 
of  a  system  of  accounts;  that  they  encroach  upon  the 
legitimate  right  of  railroad  executives  to  manage  the 
property  placed  in  their  care;  and  that  the  adminis- 
tration of  these  accounting  orders  implies  an  author- 
ity not  conferred  by  law.  There  is  undoubtedly 
some  truth  in  these  contentions.  The  public  bene- 
fits of  enforced  publicity  and  accounting  uniformity 
are  only  partially  compensating  factors. 

The  complexity  of  railroad  organization  and  ac- 
tivities and  the  narrow  margin  of  operating  profit 
render  extremely  difficult  a  completely  accurate 
statement  of  financial  results.  Every  financial  state- 
ment of  a  going  business,  no  matter  how  accurately 
and  scientifically  drawn  up  is,  at  best,  a  mere  ap- 
proximation to  truth.  Considerable  latitude  of  vari- 
ation from  exact  facts  may  occur  without  willful 
intent  to  deceive.  The  earning  of  railroad  profits 
represents  a  continuous  operation.  Actual  results 
can  be  definitely  stated  only  when  the  business  is 
wound  up  and  all  assets  realized  in  the  form  of  cash. 
Moreover,  the  varying  character  of  the  railroad 
companies  leads  to  many  difficulties  in  determining 
their  net  incomes  on  uniform  bases.  Accounting 
methods  in  large  systems  are  frequently  impractical 
when  applied  to  small  roads.  Capitalized  items  of 
expense  in  one  case  may  be  properly  considered  as 
charges  against  income  in  the  other,  and  large  capi- 
talization of  a  well -equipped  system  may  effect  a 
showing  of  operating  profits  which  would  be  en- 


186       AMERICAN  RAILROAD  ECONOMICS 

tirely  wiped  out  under  a  smaller  scale  of  capital 
investment.^ 

In  calling  attention  here  to  the  difficulties  of  laying 
down  strictly  defined  rules  of  accounting  practice, 
there  is  no  purpose  to  disparage  uniformity  or  pub- 
licity of  methods.  Any  system  which  tends  towards 
making  published  accounts  of  railroads  more  truly 
an  exhibit  of  actual  operating  results  is  desirable  as 
long  as  the  information  is  supplied  in  simplified  form, 
intelligible  to  the  layman.  Every  one  conversant 
with  American  railroad  accounts  knows  that  these 
have  improved  continuously  in  accuracy,  in  lucidity 
and  in  comprehensiveness.  Much  progress  has  been 
due  to  the  activities  of  the  Association  of  American 
Railway  Accounting  Officers.  This  organization  has 
long  maintained  cordial  relations  with  the  officials  of 
The  Interstate  Commerce  Commission,  and  has  co- 
operated in  the  formulation  of  a  prescribed  system  of 
railroad  accounts. 

^  The  Interstate  Commerce  Commission  prescribed  a  form  of  report  for 
small  roads  with  mileage  250  miles  or  less  and  having  annual  operating 
revenues  of  not  more  than  $1,000,000,  This  form  differs  from  that  of 
large  roads  only  in  the  reduction  of  a  number  of  items  required  in  ac- 
counts. 


CHAPTER  IX 

THE  INCOME  ACCOUNT — OPERATING  ACCOUNTS 

The  Form  of  the  Income  Account.  "The  Income 
Account"  in  the  language  of  the  Interstate  Com- 
merce Commission,  "brings  together  those  accounts 
which  show  the  total  amount  of  money  that  a 
company  receives  or  becomes  entitled  to  receive 
from  its  transportation  and  other  operations  during 
a  given  fiscal  period;  the  return  accrued  during  the 
period  upon  investments;  the  disbursements  and 
obligations  incurred  that  affect  the  amounts  so 
received  or  accrued,  and  the  disposition  or  allocation 
of  the  net  income  accrued."  All  this  is  exhibited  in 
the  official  arrangement  of  the  Income  Account 
which  is  here  given  in  condensed  form: 

Operating  Income: 
Rail  Operations: 

Operating  Revenues, 
Operating  Expenses, 
Net  Operating  Revenue, 

Outside  Operations: 
Revenues, 
Expenses, 

Net  Revenue  (or  Deficit), 
Total  Net  Revenue, 

(Deduct)  Taxes  Accrued: 

Operating  Income, 
187 


188      AMERICAN  RAILROAD  ECONOMICS 

Other  Income: 

Rents  Accrued  from  Lease  of  Road, 
Other  Rents — Credits: 

(a)  Hire  of  Equipment — Balance 

(b)  Joint  Facilities 

(c)  Miscellaneous  Rents 
Separately  Operated  Properties — Profit 
Dividends  Declared  on  Stocks  Owned  or  Controlled. 
Interest  Accrued  on  Funded  Debt  Owned  or  Controlled. 
Interest  on  Other  Securities,  Loans,  and  Accounts. 

Gross  Corporate  Income, 
Deductions  from  Gross  Corporate  Income: 

Rents  Accrued  from  Lease  of  Other  Roads. 
Other  Rents— Debits: 

(a)  Hire  of  Equipment — Balance 

(b)  Joint  Facilities 

(c)  Miscellaneous  Rents. 
Separately  Operated  Properties — Loss 

Interest  Accrued  on  Funded  Debt. 
Other  Interest, 

Sinking  Funds  Chargeable  to  Income, 
Other  Deductions. 

Total  deductions  from  Gross  Corporate  Income: 
Net  Corporate  Income  (or  Deficit), 

Disposition  of  Net  Corporate  Income: 
Dividends  Declared: 

(a)  On  Preferred  Stock 

(b)  On  Common  Stock 

(c)  On  Other  Securities. 

Additions  and  Betterments  Charged  to  Income, 

Appropriations  to  Reserves, 

Miscellaneous: 

Balance  for  Year  Carried  Forward  to  Profit  &  Loss. 

This  prescribed  form,  now  generally  followed  in 
railroad  reports,  is  in  accord  with  correct  accounting 
principles.     The  statement  contains  four  principal 


OPERATING  ACCOUNTS  189 

accounts  (technically  known  as  "general"  accounts) 
under  which  the  other  items  (secondary  accounts)  are 
grouped.  The  general  accounts  are,  in  their  order: 
(1)    Railway  Operating  Income,^   (2)  Other  Incomb, 

(3)  Deductions  from  Gross   Corporate   Income^    and 

(4)  Disposition  of  Net  Corporate  Income,  Under  the 
first  are  included  in  separate  accounts  the  revenues 
and  expenses  of  "rail"  and  of  "outside"  operations. 
The  other  general  accounts  are  concerned  with  the 
general  business  of  the  company. 

The  separation  in  the  accounts  of  the  transporta- 
tion business  from  the  ancillary  operations  facilitates 
a  comparison  of  the  operating  results  of  the  various 
railroad  systems.  The  separation  of  "Taxes"  and 
"Rents"  from  the  operating  expenses  establishes 
a  uniformity,  the  absence  of  which  in  previous  years 
was  a  source  of  difficulty  in  measuring  operating 
costs.  Similarly,  the  prescribed  classifications  under 
the  second  general  account.  Other  Income,  in  which 
are  included  *^ Rentals  Received''  and  ''Income  from 
Securities"  has  greatly  assisted  in  the  correct 
analysis  of  railroad  investment  activities. 

The  third  general  account,  ''Deductions  from 
Gross  Corporate  Income''  is  itemized  so  as  to  clearly 
distinguish  between  Rentals,  Interest  and  Sinking 
Fund  charges.  It  should  be  noted  that  there  are 
excluded  both  from  "Other  Income"  and  from  "De- 
ductions from  Gross  Corporate  Income"  the  receipts 
and  disbursements  on  account  of  funds  held  as 
reserves  or  sinking  funds.     These  transactions  are 

^  Including  outside  operations. 


190      AMERICAN  RAILROAD  ECONOMICS 

recorded  in  entirely  separate  accounts.  Thus, 
dividends  received  on  securities  held  in  sinking  or 
reserve  funds  are  not  a  part  of  "dividend  in- 
come." These  receipts  are  credited  to  a  separate 
account,  "Income  from  Sinking  and  other  Reserve 
Funds." 

Under  the  fourth  general  account,  Disposition  oj 
Net  Corporate  Income  are  included  dividends  on 
capital  stock  and  appropriations  for  "Additions  and 
Betterments,"  and  for  "Reserves"  charged  against 
the  Income  Account.  It  is  discretionary  with  the 
railroad  company  whether  these  deductions  are  made 
in  the  Income  Account  or  in  the  Profit  &  Loss  Account. 
In  either  event,  the  net  result  is  the  same.  To 
determine  the  full  extent  of  these  charges  in  any 
period,  however,  requires  careful  examination  of 
both  the  Income  Account  and  the  Profit  &  Loss  Ac- 
count. 

Details  of  Operating  Accounts.  The  principal 
items  under  the  general  account,  Operating  Income, 
in  the  Interstate  Commerce  Commission's  classifica- 
tion are  as  follows: 


Operating  Revenues: 
Freight, 
Passenger, 
Passenger-Other, 
Mail, 
Express, 

Miscellaneous  Transportation, 
Revenue  from  Operations  other  than  Transportation, 

Total  Revenues^ 


OPERATING  ACCOUNTS  191 

Operating  Expenses:  ^ 

Maintenance  of  Way  and  Structures, 
Maintenance  of  Equipment, 
TraflSc  Expenses, 
Transportation  Expenses, 
General  Expenses, 

Total  Expenses, 

Net  Operating  Revenue, 

The  classification  of  these  items  of  operating  rev- 
enues and  expenses  affords  opportunity  for  detailed 
comparative  analysis  of  any  railroad's  business  with 
a  view  to  determining  the  trend  of  earnings  and  the 
standards  of  operating  eflSciency.  Of  course,  not  all 
the  items  are  of  equal  importance.  Freight  and 
passenger  revenues  far  exceed  the  other  classes  of 
earnings,  which,  largely  because  of  their  incidental 
character,  may  be  conveniently  grouped  together 
as  *' miscellaneous"  operating  revenues.  Similarly, 
among  the  Operating  Expenses,  the  two  classes  of 
"maintenance"  costs  and  the  Transportation  Ex- 
penses form  the  great  bulk  of  the  expenditures.  Tr affix: 
Expenses  cover  merely  the  costs  incurred  in  retaining 
and  fostering  the  business  of  the  railroad.  The 
General  Expenses  are  the  unallocated  administrative 
costs  of  the  company.  They  cover  general  office  and 
legal  expenses,  insurance  and  relief  department  costs. 

The  items  grouped  under  ^* Outside  Operations" 

*  The  Interstate  Commerce  Commission  has  under  contemplation  a 
revised  scheme  of  operating  accounts  whereby  the  expenses  are  sub- 
classified  as  freight,  passenger  and  joint.  The  practical  success  of  this 
scheme  is  very  much  in  doubt. 


192      AMERICAN  RAILROAD  ECONOMICS 

are  inconsiderable  amounts  compared  with  those  of 
**rair'  operations.  The  details,  therefore,  have  no 
particular  significance.  The  operation  of  dining  car 
service,  hotels,  restaurants,  grain  elevators  and 
other  services  incidental  to  transportation,  are 
chiefly  responsible  for  the  items  under  the  ''Outside 
Operations^'  account. 

The  grouping  and  consistent  arrangement  of  the 
items  that  follow  the  operating  accounts  dispenses 
with  the  necessity  for  further  comment  on  the 
prescribed  form  of  the  Income  Statement,  A  correct 
understanding  of  the  substance  of  the  various  groups 
of  income  and  outgo  is  as  essential  in  gauging  real 
earning  capacity  as  their  logical  and  systematic 
sequence. 

Standard  Units  of  Operating  Receipts :  In  study- 
ing railroad  income  accounts  attention  is  naturally 
first  given  to  the  operating  receipts  commonly  known 
as  "gross  earnings."  Tliis  general  item  can  be  suc- 
cessfully analyzed  on  the  basis  of  acceptable  standard 
units.  The  simplest  linear  unit,  viz.,  ''mile  of  road'* 
is  most  frequently  employed.  Herein  is  centered  the 
greatest  misuse  and  abuse  of  railroad  statistics. 
Although  useful  for  purposes  of  compiling  general 
railroad  data,  the  "mile  of  road"  is  highly  unsatis- 
factory as  a  gauge  of  business  progress,  or  as  a  basis 
for  computing  relative  earning  power.  On  almost 
all  railroad  systems  in  the  United  States,  a  "mile  of 
road*'  today  represents  larger  capital  investment  and 
greater  concentration  of  engineering  skill  than  a 
decade  or  even  a  half-decade  ago.     Not  only  are 


OPERATING  ACCOUNTS  193 

extra  main  and  side  tracks  constantly  being  added, 
but,  as  has  already  been  pointed  out,  the  physical 
structure  of  the  track  and  roadbed  is  also  undergoing 
progressive  improvement  enabling  the  handling  of 
greater  volumes  of  traffic.  Thus,  even  on  the  same 
railroad  the  ''fer  mile  of  road^*  unit  is  of  limited 
value  in  correctly  estimating  trend  of  earnings. 
When  it  is  a  question  of  comparative  analysis  of 
two  or  more  railroads,  the  utility  of  the  '*mile  of 
road"  standard  is  almost  totally  destroyed  by  reason 
of  the  utter  lack  of  homogeneity  due  to  disparities  in 
extra  track  mileage.  Very  few  roads  have  the  same 
ratio  of  extra  main  tracks  or  are  provided  equally 
with  physical  facilities  for  handling  the  same  volume 
of  traffic. 

A  more  satisfactory  standard  is  found  in  the  ''per 
mile  of  single  track'*  unit.  This  is  based  on  total 
main  track  miles,  including  second,  third  and  other 
main  tracks,  but  not  sidings  in  yards  and  stations. 
The  companies  are  thus  statistically  comparable  in 
the  relation  of  main  track  to  earnings.  Other  physi- 
cal disparities,  however,  such  as  the  presence  or  ab- 
sence of  grades,  tunnels,  terminal  yards,  sidings 
and  the  like  also  have  an  important  bearing  on  earn- 
ing capacity. 

Some  defenders  of  the  "per  mile  of  road"  unit  for 
measiu-ing  earnings  contend  that  a  railroad's  business 
determines  the  proportion  of  extra  track  mileage. 
Extra  main  trackage,  therefore,  can  be  ignored  in 
gauging  gross  revenues.  Actual  railroad  conditions 
do  not  bear  out  this  theory.    The  Erie  Railroad,  for 


194      AMERICAN  RAILROAD  ECONOMICS 

example,  though  not  so  well  provided  with  track 
facilities,  has  a  larger  gross  revenue  jper  mile  oj  road 
than  the  Baltimore  &  Ohio,  and  its  freight  earnings 
"per  mile  of  road  exceed  those  of  the  New  York  Cen- 
tral. For  the  fiscal  year  ended  June  30,  1911,  the 
gross  earnings  of  the  Baltimore  &  Ohio  per  mile  of 
road  were  $19,881,  whereas  the  Erie  reported  $23,762. 
In  the  same  year,  the  Erie  hauled  3,039,900  tons  one 
mile  for  each  mile  of  road  operated,  compared  with 
2,639,654  ton-miles  on  the  Baltimore  &  Ohio  and 
2,610,980  ton-miles  on  the  New  York  Central.  The 
Southern  Railway,  in  the  fiscal  year  1911  had  1.29 
miles  of  track,  (including  sidings),  per  mile  of  road 
against  1.22  miles  of  the  Atlantic  Coast  Line. 
Southern's  freight  density,  however,  was  580,591 
ton-miles  compared  with  Atlantic  Coast  Line's 
395,273,  or  greater  by  47  per  cent.  Of  course,  the 
Coast  Line  carries  a  greater  proportion  of  high  grade 
freight  which  offsets  to  some  extent  its  lower  traffic 
density. 

The  "per  mile  of  road"  or  ^'per  mile  of  track" 
units  are  not  the  sole  guides  in  comparing  earn- 
ings. The  '' train-mile''  basis  is  also  of  assistance. 
The  use  of  this  standard  in  comparisons,  however, 
should  be  restricted  to  lines  having  similar  traffic. 
The  same  consideration  applies  to  the  use  of  the 
'^ locomotive-mile"  as  a  gauge  of  earning  capacity. 
This  unit  presents  the  further  difficulty  that  the 
size  and  hauling  capacity  of  locomotives  in  different 
years  or  on  different  lines  may  vary.  Moreover,  in 
both   the    '' train-mile"    and   the   ''locomotive-mile" 


OPERATING  ACCOUNTS  ld5 

averages  it  must  be  assumed  that  the  passenger 
revenues  bear  a  fixed  ratio  to  the  freight  earn- 
ings— a  condition  not  prevailing  in  railroad  oper- 
ations. 

Operating  Expenses.  As  an  indication  of  efficiency 
affecting  managerial  skill  and  financial  uniformity, 
much  dependence  is  placed  on  the  character  of  the 
operating  expenses.  This  arises  not  because  operat- 
ing expenses  are  a  more  important  factor  in  the 
determination  of  net  income  than  gross  revenues. 
In  fact,  it  is  clearly  demonstrable  that  under  normal 
conditions  an  increase  in  gross  earnings  is  a  greater 
financial  advantage  than  proportionate  reduction  in 
operating  revenues.  This  is  due  to  the  fixity  of  a 
large  part  of  operating  costs.  All  railroad  expenses 
do  not  fluctuate  in  accordance  with  the  amount  of 
business  done.  In  most  undertakings,  there  are 
certain  fixed  costs  which  must  be  met  regardless  of 
the  amount  of  the  business  or  of  the  revenue.  There 
are  also  expenses  which  fluctuate  directly,  though 
not  necessarily  proportionately,  with  each  increase 
or  decrease  in  the  units  of  service  performed. 
Hence,  in  reducing  expenses  during  dull  periods 
only  a  part  of  the  operating  costs  can  be  materially 
altered. 

In  view  of  this  condition,  it  is  obvious  that  the 
total  operating  charges  in  relation  to  each  traffic  unit 
diminish  as  the  traffic  grows  larger  and  increase  as  the 
traffic  becomes  smaller.  A  greater  net  return, 
therefore,  is  afforded  by  expansion  of  revenues  than 
by  reduction  of  expenses.    Operating  expenses,  how- 


196       AMERICAN  RAILROAD  ECONOMICS 

ever,  are,  at  least,  partly  subject  to  the  control  of  railroad 
managers,  whereas,  the  revenues  are  usually  the  result 
of  business  conditions  and  natural  forces.  More  atten- 
tion is,  therefore,  given  to  the  analysis  of  costs  of 
operation  than  to  fluctuations  in  gross  earnings.^ 
Classification  of  Operating  Expenses.  For  analy- 
tical purposes,  the  five  sub-divisions  of  operating  ex- 
penses adopted  by  the  Interstate  Commerce  Com- 
mission, viz.: — Maintenance  of  Way  and  Structures; 
Maintenance  of  Equipment;  Conducting  Transportation; 


^  Wellington  in  his  standard  treatise  on  Railway  Location  places  the 
proportion  of  expenses  that  are  fixed  regardless  of  amount  of  traffic  at 
50%  of  total  operating  costs;  proportion  of  expenses  that  are  afiFected 
only  slightly  by  increase  of  traffic  at  40%  and  the  proportion  of  expenses 
affected  directly  and  proportionately  by  increase  or  decrease  of  traffic  at 
10%.  His  illustration  of  the  efifects  of  this  condition  on  net  income 
through  increase  or  decrease  of  revenues  is  as  follows : 


Normal  basis 

Increase  of  10% 
in  gross  revenue 

Decrease  of  10% 
in  gross  revenue 

Gross  Earnings.  .  .  . 
Exp.  Unaflfected  . . . 

"     Slight.  Affect. 

"     Fully      " 

100.0% 
33.3% 

26.7% 
6.7% 

27.7% 

$7,000.  . 
2,333.. 

1,867.  . 
467.. 

$7,700 

2,333 

1,870 

510 

$6,300 

2,333 

1,850 

420 

Total  Expenses.  .  . . 
Fixed  Charges 

4,667.. 
1,800.. 

4,713 
1,800 

4,603 
1,800 

Total 

92.4% 

6,467. . 

6,513 

6,403 

Balance 

7.6% 

533.. 

1,187 

103  DeficU 

From  this  illustration  it  will  be  seen  that  an  increase  of  10%  in  gross 
revenue,  produces  an  increase  of  100%  in  the  balance  available  for  divi- 
dends, whereas,  a  decrease  of  10%  in  revenues  causes  a  deficit. 


INCOME  AND  OPERATING  ACCOUNTS    197 

Traffic,  and  General  Expenses,  may  be  classed  under 
two  groups:  (1)  Maintenance  Expenses  embracing  the 
first  two  sub-divisions,  and  (2)  Transportation  Ex- 
penses,  which  include  all  the  other  operating  costs. 
The  basis  of  this  classification  is  simple.  Maintenance 
can  be  increased,  reduced  or  deferred  to  a  large  extent 
by  the  will  of  the  management,  whereas,  other 
operating  costs  are  constantly  recurrent  and  are  not 
greatly  influenced  by  managerial  policy.  Money 
that  goes  into  maintenance  retains  the  value  of  the 
assets.  It  is  a  renewal  of  capital.  Excessive  mainte- 
nance is  like  a  reserve  fund  which  can  be  drawn  upon 
in  lean  times.  Excessive  expenditure  in  handling  and 
moving  traffic,  however,  or  in  administration  is 
once  and  for  all  time  spent  and  has  no  more  earning 
power.  Even  though  liberal  maintenance  outlay  is 
not  always  reflected  in  increased  operating  efficiency, 
never  is  increased  operating  efficiency  gained  when 
the  physical  property  is  permitted  to  deteriorate. 
The  Measurement  of  Maintenance.  A  proper  an- 
alysis of  railroad  maintenance  costs  requires  satisfac- 
tory standard  units.  This  applies  in  comparative  anal- 
yses not  only  of  different  roads,  but  also  of  different 
periods  on  the  same  road.  The  relative  expenditures 
required  for  proper  maintenance  of  roadway  and 
structures  are  influenced  (1)  by  the  nature  and  the 
amount  of  traffic,  (2)  by  the  structural  character  of 
the  roadbed  and  track,  and  (3)  by  the  geographical 
and  geological  conditions  of  the  territory.  A  double 
track  road  costs  more  to  maintain  than  one  of  single 
track.    It  does  not  follow,  however,  that  the  expense 


198      AMERICAN  RAILROAD  ECONOMICS 

should  be  twice  as  much.  Furthermore,  a  company 
having  double  the  traffic  density  of  another,  though 
operating  in  the  same  territory  and  under  similar 
conditions,  is  not  expected  to  have  double  the  amount 
of  outlay  for  upkeep.  It  is  plainly  evident  that  much 
of  the  physical  deterioration  of  roadway  and  super- 
structure is  independent  of  the  amount  of  traffic. 
Moreover,  a  favorable  topography  accessible  to 
construction  materials,  and  an  efficient  labor  force 
make  a  marked  difference  in  the  maintenance  costs 
on  a  road  possessing  these  advantages  when  con- 
trasted with  another  lacking  some  or  all  of  them. 
It  can  be  readily  conceived,  therefore,  that  in  measur- 
ing maintenance  no  one  arbitrary  standard  can  be 
relied  on  safely.  A  combination  of  various  standards 
is  a  better  guide. 

The  standard  unit  most  commonly  used  in  the 
analysis  of  maintenance-of-way  expenses  is  the 
''mile  of  road."  When  two  or  more  railroads  are 
compared  and  each,  traversing  the  same  territory,  is 
in  similar  physical  condition  and  do  the  same  amount 
of  business  this  average  may  be  found  useful.  How- 
ever, the  ''mile  of  main  track"  as  a  substitute  for 
"mile  of  road"  is  better  adapted  to  comparative 
purposes.  There  is  a  rule  which  assumes  that  two 
miles  of  side  track  or  fifteen  switches  are  as  costly  to 
maintain  as  one  mile  of  main  track.  This  calculation, 
though  purely  empirical,  is  reasonably  accurate  for 
comparative  purposes  when  traffic  conditions  are 
given  due  consideration. 

}n  every  case  of  maintenance  analysis  it  should  be 


% 

OPERATING  ACCOUNTS  199 

ascertained  whether  the  computation  is  based  on  the 
total  miles  operated  by  the  company  or  on  total  miles 
maintained.  This  distinction  is  essential  because 
most  of  the  American  railroad  systems  operate  their 
trains  over  lines  in  partnership  with  other  systems 
or  under  **  trackage  contracts."  The  mileage  operated 
under  these  conditions  may  not  carry  a  specific 
charge  which  can  be  allocated  to  the  maintenance 
account.  It  all  depends  on  the  agreement  between 
the  companies  using  the  facilities  jointly.  If  the 
lessee  has  no  obligation  of  maintenance,  the  mileage 
thus  operated  under  "trackage  rights"  is  not  to  be 
included  in  computing  the  mileage  maintained. 
Thus,  the  Southern  Railway  operated,  during  the 
year  ended  June  30,  1911,  an  average  of  7,042  miles 
of  which  6,573  were  maintained  by  the  company. 
The  remaining  469  miles  were  operated  under 
agreements  not  involving  a  direct  charge  for  up- 
keep. 

Useful  checks  on  the  per  mile  of  track  and  per  mile 
of  road  units  for  gauging  railroad  upkeep  are  the 
^'train-mile"  and  'Hon-mile"  averages.  The  fact 
that  these  units  lack  homogeneity  mihtates  some- 
what against  their  statistical  value.  Moreover, 
maintenance  expense  is  influenced  by  the  relative 
proportions  of  the  passenger  to  the  freight  business 
as  well  as  by  traflfic  density.  Disparities  in  these 
factors  require  caution  in  the  use  of  traflSc  averages 
as  a  measure  of  maintenance. 

To  illustrate  the  methods  of  gauging  maintenance- 
of-way    expenditure,    the    Southern    Railway,    the 


200      AMERICAN  RAILROAD  ECONOMICS 

Atlantic  Coast  Line  and  the  Seaboard  Air  Line  are 
selected  for  comparison: 


Year  ended  June  SOth,  1911 

Southern 
Railway 

Atlantic 
Coast  Line 

Seaboard 
Air  Line 

Miles  of  Single  Track  per  mile 
of  road 

1.29 
580,591 

$        821 

$     1,140 
$             1.83 
$           22.91 

1.22 
395,273 

716 

863 
2.21 
24.13 

1.28 

Ton-miles  per  mile  of  road .  . . 

Maintenance  of  Way,  etc.: 
Per    Mile    of    Single    Track 
Operated 

420,031 
762 

Per    Mile    of    Road    Main- 
tained.  . 

934 

Per  Thousand  Ton-miles.  .  .  . 
Per  Revenue  Train-mile 

2.22 
25.91 

By  reference  to  the  above  standards  it  appears 
that  the  Atlantic  Coast  Line's  upkeep  is  on  a  lower 
scale  than  that  of  the  other  two  systems.  On  u 
'per-mile  basis  the  Southern's  expenditure  is  the  larg- 
est, though,  when  measured  with  respect  to  per- 
formance, {i.  e.,  by  train-miles  and  ton-miles),  it 
falls  behind  both  the  Seaboard  Air  Line  and  the 
Atlantic  Coast  Line.  However,  the  Southern's 
heavier  traffic  density  would  naturally  reduce  its 
costs  per  traffic  unit,  for  though  the  aggregate  ex- 
penses of  operation  increase  as  traffic  increases  the 
rate  of  increase  is  at  a  slower  ratio.  Even  with  this 
consideration,  however,  we  must  hesitate  in  granting 
the  prize  to  the  Southern.  Our  conclusion  may  be 
statistically  sound  but  may  lack  absolute  correctness 
because  of  failure  to  consider  differences  in  operating 


OPERATING  ACCOUNTS  201 

conditions.  The  disturbing  element  in  our  analysis 
is  the  fact  that  the  Southern  Railway  Company 
operates  largely  through  mountainous  sections  where 
the  effects  of  natural  wear  and  tear  are  intensified 
and  where  the  difficulties  of  upkeep  are  enhanced. 
The  Seaboard  Air  Line  and  the  Atlantic  Coast  Line 
traverse,  for  the  most  part,  a  flat,  tidewater  coun- 
try, favorable  to  low-cost  maintenance.  To  what 
extent  allowance  should  be  made  for  topographical 
and  geological  disparities  is  frequently  impossible 
of  determination.  The  best  that  can  be  done  by 
the  analyst  is  to  know  where  to  place  the  handicap 
and  to  see  that  the  statistical  results  obtained  are 
not  impaired  by  disparities  in  attending  circum- 
stances. 

Equipment  Maintenance.  The  selection  of  proper 
standards  in  gauging  equipment  maintenance, 
whether  from  the  standpoint  of  adequacy  or  of 
operating  efficiency,  is  of  great  importance  in  railroad 
management.  The  commonly  used  standards  for 
locomotive  maintenance  are  cost  per  locomotive,  or 
cost  per  locomotive-mile.  The  value  of  these  units  in 
comparisons,  however,  may  be  completely  destroyed 
by  differences  in  the  size  of  locomotives,  in  the 
operating  conditions,  or  in  the  nature  of  tonnage 
hauled.  The  same  objections  apply  to  comparisons 
of  both  passenger  and  freight  car  maintenance. 
Not  only  do  cars  and  locomotives  of  different  rail- 
roads vary  in  average  size  and  quality,  but  some  lines 
are  better  supplied  with  equipment  than  others. 
Those  which  are  relatively  richest  in  rolling  stock 


202      AMERICAN  RAILROAD  ECONOMICS 

naturally  require  less  maintenance  expenditure  per 
unit  of  equipment. 

It  is  evident  that  considerable  caution  is  demanded 
in  selecting  proper  standards  for  measurement  of 
equipment  maintenance.  As  already  pointed  out 
with  reference  to  maintenance-of-way  expenditures, 
possible  disparities  in  the  various  factors  should  be 
ascertained  before  making  comparisons.  When 
differences  in  conditions  are  found  which  may  vitiate 
the  selected  standard  units,  others  should  be  em- 
ployed. Thus,  when  there  is  considerable  disparity 
between  the  average  tractive  power  per  locomotive  on 
two  different  lines  the  maintenance  cost  per  locomotive 
should  be  substituted  by  some  other  standard  as 
^^maintenance  per  pound  of  locomotive  tractive  power. '^ 
If  it  happens  that  on  one  road  the  average  number 
of  miles  run  by  each  locomotive  per  annum  is  decid- 
edly in  excess  of  the  same  average  on  another  line, 
the  ^'locomotive  maintenance  cost  per  locomotive-mile'' 
may  be  of  value  as  a  test  of  upkeep.  To  obviate  the 
disturbing  effects  of  disparities  in  both  the  size  of 
locomotives  and  in  the  locomotive  performance, 
the  units  maintenance  cost  per  locomotive-mile  and 
cost  per  pound  of  tractive  power  may  be  combined  as 
shown  on  the  opposite  page. 

It  would  seem  merely  from  the  comparative  state- 
ment that  on  the  basis  of  the  locomotive  unit  the 
Southern  expended  a  slightly  larger  sum  for  locomo- 
tive upkeep  than  the  Atlantic  Coast  Line,  and 
less  than  that  of  the  Seaboard  Air  Line.  The  slight 
excess  pver  Atlantic  Coast  Line  may  arise,  however, 


OPERATING  ACCOUNTS  203 

Comparative  Locomotive  Maintenance  Expenditures 


Southern 

Atlantic 

Seaboard 

Year  ended  June  30th,  1911 

Railway 

Coast  Line 

Air  Line 

Average  tractive  power  per 

locomotive,  pounds 

32,300 

20.560 

25,920 

Maintenance  of  Locomotives: 

Per  Locomotive $ 

2,599 

2,252 

2,721 

Per  Locomotive-mile. . . .  cts. 

9.44 

7.12 

8.45 

Per  pound  tractive  power  cts. 

8.76 

11.08 

10.80 

Per  Locomotive-mile  per 

thousand    pounds      of 

tractive  power cts. 

.31821 

.3501 

.3170 

from  the  larger  size  of  the  Southern's  locomotives. 
This  is  plainly  evident  when  the  computation  of 
maintenance  is  based  on  the  tractive  power  unit  for, 
in  this  respect,  the  Southern  falls  behind  both  the 
Seaboard  and  the  Coast  Line.  But,  on  the  basis  of 
the  locomotive-mile,  the  Southern,  with  9.44  cts.  shows 
a  higher  average  than  the  Seaboard  and  the  Atlantic 
Coast  line  with  8.45  cts.  and  7.12  cts.,  respectively. 
When,  however,  the  computation  of  locomotive  main- 
tenance cost  is  made  on  the  combined  basis  of  perform- 
ance and  of  size  of  locomotives  (per  locomotive-mile 
per  pound  of  tractive  power)  the  Atlantic  Coast  Line 
shows  the  highest  average  in  spite  of  the  fact  that  it 
expends  less  per  locomotive  for  upkeep  than  the  other 
two  railroad  systems.  This  analysis  demonstrates 
the  caution  necessary  in  basing  judgment  on  the  use 
of  a  single  statistical  standard.    Each  separate  test 

^  Approximatel;^. 


204      AMERICAN  RAILROAD  ECONOMICS 


requires  further  confirmation  by  the  application  of 
additional  standard  units. 

In  computing  the  scale  of  passenger  and  freight 
car  maintenance  costs,  the  same  methods  may  be 
followed  as  in  the  study  of  locomotive  upkeep.  Here, 
also,  we  may  take  for  illustrative  purposes  the  three 
leading  southern  systems: 

Freight  and  Passenger  Car  Maintenance 


Year  ended  June  30th,  1911 


Southern 
Railway 


Atlantic 
Coast  Line 


Seaboard 
Air  Line 


Freight  Cars,  number 
Average  capacity  per  freight 

car  (tons) 

Revenue  Ton-miles  per  ton 

of  capacity 

Maintenance  per  freight  car 
$ 
Maintenance  per  car-mile  cts. 
Maintenance  per  ton  car 

capacity cts. 

Passenger  Cars 

Maintenance  per  car $ 

Maintenance  per  passen- 
ger car-mile cts. 


51,846 

35.1 

2,169 

82 
.98 

2.46 

758 
1.02 


25.205 

28.7 

2,301 

89 
1.05 

3.12 

916 

1.26 


14,844 

33.9 

2,550 

73 
.80 

2.17 

880 
1.11 


It  appears  that  the  Atlantic  Coast  Line  expends 
relatively  more  for  passenger  and  freight  car  upkeep 
than  the  other  two  systems.  Before  accepting  this 
conclusion,  however,  inquiry  should  be  made  con- 
cerning the  equipment  supply  of  each  company 
relative  to  traffic.  The  more  equipment  used  for 
moving  a  given  volume  of  freight  the  less  ordinarily 


OPERATING  ACCOUNTS  205 

will  be  the  wear  and  tear  per  equipment  unit.  An 
examination  of  the  Atlantic  Coast  Line's  freight  car 
facilities  does  not  reveal  an  appreciable  difference 
in  this  respect  from  the  other  two  companies.  Thus, 
the  Atlantic  Coast  Line  had  one  ton  of  car  capacity 
for  every  2301  ton-miles  of  revenue  freight,  whereas, 
the  Southern  had  one  ton  capacity  to  2169  ton-miles 
and  the  Seaboard  Air  Line  had  one  ton  capacity  to 
2550  ton-miles.  Of  course,  there  are  other  factors 
which  might  destroy  the  correctness  of  the  statistical 
comparison.  For  example,  it  is  possible  that  the 
cars  of  one  railroad  system  are  largely  of  steel  con- 
struction. This  equipment  requires  relatively  less 
repair  expense  than  old  type  wooden  cars.  Again, 
one  company  may  have  its  repair  shops  well  managed 
and  conveniently  distributed  along  its  lines,  whereas, 
another  line  may  not  be  so  well  provided  with  repair 
faciUties  and  may  find  it  necessary  to  give  its  dam- 
aged equipment  over  to  outside  concerns  for  repair. 
The  policy  of  each  railroad  company  in  setting 
aside  reserves  from  earnings  to  cover  equipment 
depreciation  is  an  influencing  element  in  upkeep 
expense.  At  this  writing,  the  Interstate  Commerce 
Commission,  though  requiring  depreciation  accounts, 
has  instituted  no  definite  rate  or  amount  to  be 
periodically  applied  as  depreciation.  This  matter  is 
therefore  discretionary  with  the  individual  railroad 
companies.  The  annual  renewal  expense  is  likewise 
largely  a  question  of  policy  with  the  railroad  manage- 
ment. The  "scrapping"  and  replacing  of  old  and 
worn-out  equipment  can  take  place  when  ordered  by 


206      AMERICAN  RAILROAD  ECONOMICS 

operating  oflScials.  It  is  not  regularly  recurrent  as 
ordinary  repairs.  Accordingly,  in  analyzing  equip- 
ment maintenance  expenses,  it  may  be  well  to 
separate  the  ''renewaV  and  ''depreciation"  items 
from  the  cost  of  repairs,  though  the  most  satisfac- 
tory calculations  are  based  on  a  combination  of  the 
three  general  items,  ''repairs,  renewals,  and  deprecia- 
tion," 

In  all  studies  of  maintenance  expense,  the  "human 
factor"  should  not  be  overlooked.  The  general 
discipline  among  all  employees  as  well  as  the  effi- 
ciency of  the  mechanical  departments  of  the  railroads 
may  effect  a  considerable  reduction  in  repair  costs 
without  in  any  way  lowering  the  standard  of  upkeep. 
A  recent  careful  investigation  of  freight  car  damage 
has  led  to  the  belief  that  more  than  50  per  cent,  of 
such  losses  are  due  to  unfair  usage  and  rough  han- 
dling. When  employees,  through  discipline  and  good 
management,  refrain  from  abusing  equipment,  repair 
bills  are  reduced  and  the  life  of  equipment  is  ex- 
tended beyond  the  general  average.  Much  of  the 
large  capital  outlay  required  by  the  purchase  of 
durable  equipment,  such  as  heavy,  all-steel  cars 
might  likewise  be  obviated.  All  this  tends  to  widen 
the  margin  of  railroad  profits. 

The  common  practice  of  "hiring"  equipment, 
likewise,  influences  car  repair  costs.  Under  the  pre- 
vailing system  of  freight  car  interchange  the  owning 
company  usually  pays  for  repairs  arising  from  the 
ordinary  wear  and  tear  of  equipment  due  to  use.  The 
borrowing  line  pays  only  for  repairs  due  to  rough 


OPERATING  ACCOUNTS  207 

iiandling,  wrecks  and  fire.  Accordingly,  the  rental 
for  hired  cars  theoretically  covers  interest,  deprecia- 
tion and  ordinary  repairs.  But  under  the  Interstate 
Commerce  Commission's  rules  no  portion  of  the 
car  rental  is  credited  to  car  repairs.  It  is  therefore 
evident  that  in  the  case  of  a  road  owning  1,000  cars 
and  borrowing  500  foreign  cars  the  cost  of  keeping 
up  repairs  is  less  per  unit  than  if  all  the  1,500  cars 
were  owned.  The  owning  road,  on  the  other  hand, 
will  have  a  relatively  higher  cost  per  unit  since  its 
repair  account  is  charged  with  the  wear  and  tear 
of  service  given  to  another  line.  Of  course,  the 
rental  received  may  reimburse  the  owner,  but  this 
is  not  a  factor  in  the  maintenance  computations. 
Thus,  cost  of  repairs  'per  car  as  usually  figured  may 
be  misleading.  A  casual  inference  that  a  company 
has  made  a  good  maintenance  showing  may  be  re- 
versed by  a  careful  analysis. 

The  correct  computation  of  equipment  mainte- 
nance costs  is  of  the  highest  economic  importance  to 
the  railroads.  In  this  department,  lack  of  close  ob- 
servation and  managerial  skill  produce  wastes  and 
losses  seriously  impairing  earning  power.  The  expe- 
riences of  both  the  Atchison  and  the  Illinois  Central 
railroads  are  cases  in  point.  The  Illinois  Central  in 
1907,  began  to  "farm  out"  its  freight  cars  for  repairs 
with  the  result  that  the  cost  of  freight  car  upkeep 
increased  steadily,  jumping  from  $3,924,296  in  1906, 
to  $7,975,992  in  1910.  An  investigation  finally  re- 
vealed that  gross  frauds  had  been  practiced  in  the 
company's  repair  department.    Had  the  company's 


308      AMERICAN  RAILROAD  ECONOMICS 


directors  compared  its  freight  car  maintenance  cost 
with  those  of  competing  companies,  the  condition 
of  affairs  might  have  been  discovered  much  sooner. 
The  stockholders  might  have  been  spared  the  heavy 
loss,  estimated  in  some  quarters,  as  high  as  $6,000,000. 
Thus,  a  comparison  of  freight  car  maintenance  of 
the  Illinois  Central,  the  Cincinnati,  New  Orleans  & 
Texas  Pacific,  and  the  Mobile  &  Ohio  would  have 
shown:  ^ 


Illinois  Central 

Cm.  N.  0.  & 
T.  Pac. 

Mobile  &  Ohio 

Year 

Per  Frt. 

Per  Frt. 

Per  Frt. 

Per  Frt. 

Per  Frt. 

Per  Frt. 

car 

car  mile 

car 

car  mile 

car 

car  mile 

1908 

$  86.02 

1.03c 

$91.47 

1.63c 

$75.92 

0.72c 

1909 

99.08 

1.28 

69.72 

1.17 

60.53 

0.66 

1910 

130.22 

1.51 

78.04 

1.20 

94.94 

0.99 

The  pronounced  increase  in  Illinois  Central's 
freight  car  maintenance  costs  in  1909  and  1910  would 
seem  to  indicate  a  **  leakage,"  without  reference  to 
similar  costs  on  rival  systems.  By  making  a  com- 
parative analysis,  however,  and  allowing  for  pos- 
sible disparities  due  to  differences  in  attending 
circumstances,  evidence  of  fraud  becomes  clearly 
manifest. 

^  The  computations  are  taken  from  Messrs.  Price,  Waterhouse  & 
Company's  excellent  compilation  of  Railroad  Statistics.  The  averages 
are  arrived  at  by  dividing  the  total  "Repairs,  Renewals  and  Deprecia- 
tion" accounts,  as  shown  under  the  heading  "Maintenance  of  Equip- 
ment," by  the  number  of  units  of  each  class  of  equipment  on  hand  at  the 
beginning  of  the  year. 


OPERATING  ACCOUNTS  209 

Conducting  Transportation  Costs.  The  trans- 
portation costs  are  the  items  of  expense  directly 
incurred  in  moving  the  traflSc.  As  has  already  been 
pointed  out,  they  differ  in  character  from  mainte- 
nance expenses;  first,  because  they  cannot  be  ar- 
bitrarily adjusted  and,  secondly,  because  when  once 
paid  out  no  value  remains  to  represent  the  outlay. 
These  fundamental  distinctions  make  it  evident 
that  all  possible  economy  consistent  with  service 
should  be  practiced  in  conducting  transportation. 
As  many  operating  costs  are  unaffected  by  volume 
of  business,  increase  in  gross  earnings,  other  things 
being  equal,  should  result  in  a  smaller  ratio  of  oper- 
ating expense  to  earnings.  The  ratio  of  the  cost  of 
conducting  transportation  to  operating  revenues  is, 
therefore,  a  good  index  of  efficiency  when  not  accounted 
for  by  changes  in  rates  or  in  operating  conditions.  As 
between  different  railroads,  however,  caution  must 
be  exercised  in  using  this  index.  Local  conditions 
as  well  as  disparities  in  kind  and  in  amount  of 
traflBc  affect  transportation  costs  to  an  even  greater 
degree  than  maintenance  costs.  Fast  and  frequent 
freight  service  requiring  light  train-loads  increase 
transportation  costs.  Similarly,  heavy  grades,  in- 
sufficient trackage,  weak  bridges  and  the  like  cause 
loss  in  speed  and  in  service.  All  this  means  larger 
wage  and  fuel  costs  than  when  physical  facilities 
permit  the  maximum  speed  and  the  minimum  time. 
On  the  other  hand,  the  relatively  smaller  transpor- 
tation costs  resulting  from  improved  physical  facili- 
ties are  generally  effected  by  heavy  increase  in  the 


210      AMERICAN  RAILROAD  ECONOMICS 

permanent  capital  investment  in  the  property.  The 
heavier  interest  and  dividend  charges  on  capital 
investment  may  therefore  wholly  offset  the  saving 
in  operating  expense.  The  great  problem  always 
before  the  railroad  financier  is  to  determine  how  far 
the  saving  in  transportation  and  in  other  costs  aris- 
ing from  proposed  improvements  and  betterments 
will  outstrip  the  cost  of  the  new  capital  required  for 
these  purposes. 

The  very  nature  of  the  transportation  expenses, 
(i.  e.,  the  impossibility  of  physically  tracing  their 
results  on  the  property),  affords  opportunities  for 
waste  and  extravagance.  Consequently,  their  close 
supervision  and  proper  measurement  is  of  great 
value  to  railroad  managers  and  investors.  This  is 
particularly  true  at  the  present  time  when  railroad 
operations  are  circumscribed  by  government  regula- 
tions and  susceptible  to  the  scrutiny  of  expert  ana- 
lysts and  efficiency  engineers.  The  Interstate  Com- 
merce Commission  has  publicly  announced  that  no 
increase  in  freight  rates  would  be  sanctioned  until 
it  was  proven  that  all  possible  efforts  towards  econ- 
omy in  operations  had  been  made  by  the  companies.^ 

Through  economy  experiments  conducted  by  the 
railroads,  and  through  the  activities  of  efficient 
executives,  some  splendid  results  in  reduction  of 
transportation  costs  have  been  obtained.  In  view 
of  the  Government's  attitude  in  rate-making  further 
progress  along  these  lines  may  be  expected.     The 

1  See  In  re  Investigation  of  Advances  in  Rates  by  Carriers  in  Official 
Classification  Territory  No.  3400. 


OPERATING  ACCOUNTS  211 

investor  in  railroad  securities  will  enjoy  the  benefits, 
however,  only  in  so  far  as  the  economies  effected  by 
the  company  in  which  he  is  concerned  are  equal  to 
or  in  advance  of  the  general  standards  obtaining 
among  all  railroad  companies. 

Locomotive   Fuel   Expense,    One   of    the 

largest  items  among  the  transportation  costs  is  loco- 
motive fuel.  This  item  consumes,  approximately, 
10  per  cent,  of  the  gross  railroad  earnings,  and  the 
railroads  in  the  aggregate  use  about  one-fourth  of 
the  total  coal  production  of  the  country.  The  fuel 
cost  to  railroads  in  the  United  States  now  exceeds 
$200,000,000  annually,  or  about  $4,000  per  locomo- 
tive. For  individual  railroad  systems,  the  locomo- 
tive fuel  comprises  from  20  per  cent,  to  35  per  cent, 
of  the  total  expenses  grouped  under  "  Conducting 
Transportation . '  * 

In  view  of  the  upward  price  tendency  of  fuel  ma- 
terials an  analysis  of  this  item  from  year  to  year, 
particularly  in  reference  to  locomotive  performance, 
is  worthy  of  close  attention.  Fuel  economy  means 
not  only  reduced  fuel  expense,  but  also  increased 
hauling  capacity  in  proportion  to  the  weight  of  the 
locomotive.  It  means  less  difficulty  in  firing  locomo- 
tives and  more  reserve  power  for  making  up  time 
and  for  handling  trains  in  bad  weather.  Accord- 
ingly, the  possibility  of  decreasing  fuel  costs  presents 
a  promising  field  for  scientific  investigation  and  ex- 
perimentation. Data  regarding  locomotive  fuel  ex- 
pense generally  can  be  found  in  railroad  reports 
under    the    statistics    of    locomotive    performance. 


212      AMERICAN  RAILROAD  ECONOMICS 

Thus,  the  Erie's  reports  for  the  fiscal  years  1909  to 
1912,  inclusive,  contain  the  following  relative  to 
locomotive  fuel: 


Locomotive  Fuel  Statistics 

1912 

1911 

1910 

1909 

Pounds  consumed  per  locomotive 
mile 

168.1 
12.46c 
15.57c 

168.8 
12.19c 
15.27c 

170.4 
12.04c 
16.06c 

174.0 

Cost  per  locomotive-mile 

Cost  per  1,000  ton-miles 

12.26c 
15.27c 

There  is  here  some  evidence  of  better  fuel  economy, 
for  notwithstanding  the  larger  size  of  locomotives, 
the  consumption  of  coal  per  locomotive-mile  was 
5.9  pounds  less  in  1912  than  in  1909.  The  cost  per 
locomotive-mile,  however  was  20c.  more.  The  cost 
per  thousand  ton-miles,  in  1912,  was  also  more  than 
in  1909,  though  slightly  below  that  of  1910. 

Wages.  Wages  constitute  another  leading  ex- 
pense in  conducting  transportation.  Opportunities 
for  economy  under  this  heading  are  not  as  available 
as  with  other  expense  items.  The  strong  organiza- 
tions of  railroad  employees  engaged  in  the  moving 
of  traflSc  enhance  their  ability  to  command  com- 
pensation as  great,  if  not  greater,  than  prevails  among 
other  classes  of  workers  of  similar  standing.  This 
forces  the  railroads  to  economize  by  promoting  effi- 
ciency among  their  working  forces.  A  highly  dis- 
ciplined force  of  employees  undoubtedly  contri- 
butes to  economies  in  transportation  operations 
which  more  than  offset  the  high  wage  cost.  It  is 
evident,  therefore,  that  reductions  in  the  wage  pay- 


OPERATING  ACCOUNTS  213 

ments  to  employees  are  not  always  an  indication  of 
more  economical  and  efficient  management. 

The  Operating  Ratio.  The  percentage  of  the  total 
operating  expenses  to  the  operating  revenues  is  desig- 
nated by  railroad  statisticians  as  the  Operating 
Ratio,  This  is  generally  considered  a  valid  index 
of  economical  handling  of  the  railroad's  business. 
In  this  respect,  however,  its  value  is  liable  to  ex- 
aggeration. Considered  by  itself,  without  reference 
to  the  various  conditions  and  factors  influencing 
operating  costs,  the  "Operating  Ratio"  is  absolutely 
worthless.  -^  In  the  first  place,  error  can  easily  be 
made  in  comparing  operating  ratios  of  different  sys- 
tems by  reason  of  opposed  financial  policies  in  the 
roads  compared.  For  example,  the  operating  ratios 
would  not  be  comparable  in  the  case  of  two  systems 
one  of  which  charges  as  much  of  permanent  improve- 
ment expenditure  as  possible  to  ** repairs  account" 
and  the  other  as  little  as  possible.  Secondly,  a  large 
proportion  of  low  grade  tonnage  moved  at  a  cheap 
rate  over  a  line  of  light  traffic  causes  a  high  operating 
ratio.  Thus,  an  increase  of  branch  mileage,  with 
but  few  exceptions,  leads  to  higher  operating  ratios. 
Low  grade  tonnage,  however,  when  combined  with 
heavy  traffic  density  and  a  capacity  for  doing  the 
business,  may  mean  a  profitable  net  return  on  capi- 
tal even  at  a  high  operating  ratio.  On  the  other 
hand,  a  low  operating  ratio  with  a  light  traffic  den- 
sity may  afford  no  return  at  all  on  capital  invest- 
ment.   In  fact,  many  of  the  standard  dividend  pay- 


214        AMERCAN  RAILROAD  ECONOMICS 

ing  railroads  that  do  a  heavy  business  have  larger 
operating  ratios  than  their  nondividend  paying  rivals. 
On  the  other  hand,  companies  whose  tonnage  in- 
cludes high-class  commodities  of  small  bulk,  but 
which  involve  costly  transportation  service  are  likely 
to  have  high  operating  ratios,  without  a  detriment 
to  good  earning  power.  Thus,  the  Chicago  &  North 
Western  had  an  operating  ratio  in  1911  and  1912, 
respectively,  of  71.5  per  cent,  and  70.8  per  cent,  com- 
pared with  but  61.4  per  cent,  and  56.9  per  cent,  on 
the  Great  Northern.  But  the  Chicago  &  North 
Western  carries  a  much  smaller  proportion  of  low 
grade  freight  and  a  considerably  larger  amount  of 
package  freight  (merchandise).  It  has  also  a  heavier 
passenger  business  than  the  Great  Northern.  All 
these  factors  are  conducive  to  a  higher  operating 
ratio,  but  do  not  necessarily  imply  inferior  earning 
power. 

With  intensive  development  of  transportation 
facilities  there  is  a  natural  tendency  for  the  operating 
ratio  to  increase.  In  all  business  enterprises,  the 
margin  of  profit  in  the  exchange  of  commodities  or 
of  services  is  largely  dependent  on  the  rapidity  of 
the  "turnover."  By  "turnover"  is  meant  the  rela- 
tive time  required  in  converting  the  capital  "locked 
up  "  directly  in  the  manufacture  or  sale  of  commodi- 
ties or  in  the  performance  of  a  service  back  into  its 
original  substance,  "cash."  A  grocery  merchant, 
who  changes  his  stock  in  trade  an  average  of  twelve 
times  a  year,  other  things  being  equal,  will  earn  the 
same  rate  on  his  capital  as  a  jewelry  merchant  whose 


OPERATING  ACCOUNTS  215 

stock  changes  but  once  a  year,  but  whose  margin  of 
profit  on  each  sale  is  twelve  times  that  of  the  grocer. 
This  condition  applies  to  railroad  operations.  The 
large  investment  of  railroads  in  fixed  property  adds 
to  the  economic  importance  of  doing  a  maximum 
business  in  the  minimum  time,  even  though  the 
average  margin  of  profit  on  the  services  performed 
may  be  thereby  reduced.  A  railroad  company  that 
doubles  its  traffic  without  increase  in  permanent 
investment  will  earn  as  much  for  its  stockholders  on 
a  1^3/^  per  cent,  margin  of  profit  as  on  a  25  per  cent, 
margin  with  half  the  business.  Under  the  old 
conditions,  however,  its  operating  ratio  was  75  per 
cent,  but  for  the  purpose  of  doubling  the  business, 
it  becomes  just  as  profitable  to  work  under  an  oper- 
ating ratio  of  873/2  per  cent.  In  this  event,  an  in- 
creased operating  ratio  is  no  loss  to  the  railroad  and 
a  direct  gain  to  the  public. 

When  outside  business  circumstances  and  operat- 
ing conditions  undergo  no  pronounced  change,  the 
operating  ratio  may  be  used  as  an  index  of  efficiency 
on  the  same  railroad  over  a  period  of  years.  Its 
proper  use,  however,  requires  caution.  Aside  from 
accounting  changes,  the  general  ratio  of  expense 
to  revenues  may  fail  to  indicate  changes  in  mainte- 
nance and  in  operating  policy,  or  in  the  physical 
substance  of  the  property  and  equipment.  Exten- 
sive improvement  work  on  railroad  lines  interferes 
with  traffic  operations  and  thus  causes  a  pronounced 
increase  in  the  operating  ratio.  The  human  factor 
as  an  element  should  likewise  not  be  overlooked. 


216      AMERICAN  RAILROAD  ECONOMICS 

Economy  at  the  expense  of  efficiency  is  a  loss,  though 
it  may  result  in  lowering  the  operating  ratio,  A 
high  standard  of  service,  a  well  paid,  well  disciplined 
force  of  employees,  and  a  well  maintained  property, 
are  of  more  permanent  value  than  temporary  show 
of  large  earning  capacity. 

In  making  a  comparative  analysis  of  the  operating 
ratio  from  year  to  year  an  advantage  is  gained  by 
separately  considering  the  five  main  divisions  of 
the  operating  expenses.  In  this  way  is  determined 
how  far  each  group  has  contributed  toward  an  in- 
crease or  a  decrease  in  the  general  ratio.  Thus, 
the  Baltimore  &  Ohio  Railroad's  operating  ratio  for 
the  fiscal  years  1908-1911,  inclusive,  has  been  as 
follows: 


Percentage  of  gross  earnings  ex- 
pended for 


Baltimore  &  Ohio  Railroad 


1908 


1909 


1910 


1911 


Maintenance  of  Way  and  struc- 
tures  

Maintenance  of  Equipment 

Traffic  Expenses 

Conducting  Transportation  Ex- 
penses  

General  Expenses 

Total  Operating  Ratio 


% 
14.37 
17.51 

2.27 

37.66 
2.08 

73.89 


% 
12.69 
15.46 

2.26 

34.41 
2.08 

66.90 


% 
13.12 
18.42 

2.11 

33.45 
1.89 

68.99 


% 
11.66 
18.02 

2.21 

37.23 
2.08 

71.20 


A  study  of  the  above  table  shows  that  the  high 
operating  ratio  in  the  year  1911  was  caused  by  in- 
crease in  the  proportion  of  transportation  costs. 
The  maintenance  expenses  combined,  in  1911,  were 


OPERATING  ACCOUNTS  217 

29.68  per  cent,  against  31.54  per  cent,  the  previous 
year,  whereas,  the  transportation  expenses  amounted 
to  but  33.45  per  cent,  in  1910,  compared  with  37.23 
per  cent,  in  1911,  and  as  against  34.41  per  cent,  in 
1909.  By  thus  separating  the  principal  factors  of 
the  operating  ratio,  the  trend  and  fluctuations  in 
maintenance  and  other  expenses  can  be  readily 
traced.  This  must  always  be  done  in  order  to  deter- 
mine operating  efficiency  by  means  of  the  general 
ratio.     Otherwise,  the  standard  is  meaningless. 

Net  Operating  Revenue.  The  deduction  of  the 
*^ Operating  Expenses''  from  the  ^'Operating  Reve- 
nues'' gives  the  ^^Net  Revenue  from  'Rail'  Opera- 
tions, "  or  "  Net  Operating  Revenue. ' '  ^  Except  in  small 
and  unimportant  systems  this  item  does  not  indicate 
the  extent  of  earning  capacity  or  the  return  on 
capital  investment.  The  fact  that  one  company 
has  net  operating  revenue  "per  mile  of  road"  or 
''per  train-mile"  twice  as  great  as  another  does  not 
necessarily  indicate  that  the  profitableness  of  the 
business  of  the  first  is  greater.  The  Erie  Railroad's 
net  operating  revenue  "per  mile  of  road"  is  about 
six  times  that  of  the  Atlantic  Coast  Line.  Yet,  the 
latter  company,  because  of  the  low  construction  cost 
of  its  property  and  conservative  capitalization,  affords 
a  better  return  on  actual  investment  than  the  Erie. 

^  There  is  an  absence  of  uniformity  in  the  use  of  the  terms  "  Net 
Operating  Revenue"  and  "Operating  Income."  According  to  the  Inter- 
state Commerce  Commission,  the  latter  represents  the  balance  of  the 
"Net  Operating  Revenue"  after  the  inclusion  of  the  net  income  or  net 
deficit  arising  from  "Outside  Operations"  and  after  the  deduction  of 
"Taxes  Accrued." 


218       AMERICAN  RAILROAD  ECONOMICS 

The  growth  of  net  revenue  in  relation  to  capital 
investment  in  the  railroad  is  an  important  factor  in 
gauging  j&nancial  progress.  Although  both  gross 
and  net  earnings  of  a  railroad  system  may  be  con- 
stantly expanding,  the  gains  along  these  lines  may 
not  compensate  for  the  additional  capital  utilized  in 
producing  the  improved  operating  results.  Increased 
traffic  density,  heavier  car  loading  and  the  progres- 
sive betterment  in  transportation  facihties  have 
promoted  the  expansion  of  railroad  revenues.  This 
is  the  natural  effect  of  growth  in  wealth  and  popula- 
tion. Financial  interests,  however,  are  unfavorably 
affected  if  the  result  has  been  obtained  with  larger  cajrl- 
.tal  expenditure  than  is  warranted  by  the  increased 
"profits. 

The  financial  troubles  of  the  Wabash  Railroad 
illustrate  this  point.  During  the  years  1905-1912 
the  gross  and  net  earnings  of  the  Wabash  under- 
went considerable  expansion.  Without  change  in 
mileage,  net  operating  revenue  grew  from  $4,987,025 
in  1905  to  $7,517,854  in  1911,  a  gain  of  about  60 
per  cent.  In  the  meantime,  however,  the  charges 
against  income  increased  enormously.  These  fixed 
charges,  because  of  necessary  expenditures  to  keep 
the  railroad  in  efficient  condition,  could  not  be  met. 
A  receivership  and  reorganization  is  the  usual  out- 
come of  this  condition. 

Taxes.  According  to  the  ruling  of  the  Interstate 
Commerce  Commission,  "Taxes"  are  separated  from 
^'Operating  Expenses'^  and  are  deducted  from  ''Net 
Operating  Revenue"  so  as  to  obtain  the  ''Operating 


OPERATING  ACCOUNTS  219 

Income.^'  The  underlying  basis  of  this  ruling  lies 
in  the  fact  that  taxes,  unlike  other  railroad  expendi- 
tures, are  determined  by  political  authority  and  not 
by  the  policy  of  the  railroad  directors,  or  by  the 
exigencies  of  the  transportation  service.  Moreover, 
taxes  are  "fixed"  charges  against  railroad  revenues 
and  take  precedence  over  all  other  liens  on  property 
and  earnings.  The  item  "  Taxes"  in  the  Income  State- 
ment, therefore,  is  worthy  of  close  attention  in  the 
study  of  railroad  earnings.  Practically  all  important 
transportation  systems  are  subject  to  the  varying 
tax  laws  of  two  or  more  states.  Lack  of  uniformity 
and  frequent  changes  in  taxing  methods  afford  no 
certainty  of  the  aggregate  amount  any  company 
may  be  assessed  for  public  revenue.  The  contrasts 
in  the  scale  of  railroad  taxation  in  the  various  states 
is  most  striking.  An  oflScial  computation  made  some 
time  ago  showed  variations  in  the  percentage  of. 
taxes  to  railroad  gross  earnings  ranging  from  2.7 
per  cent,  up  to  4.8  per  cent,  the  lowest  being  in  a 
group  of  states  made  up  of  Maryland,  Pennsylvania, 
District  of  Columbia  and  Delaware,  and  the  highest 
in  the  group  made  up  of  Connecticut,  Maine  and 
Rhode  Island.  In  percentage  of  taxes  to  net  earnings 
the  range  was  from  6.9  per  cent,  in  a  group  of  states 
made  up  of  California,  Nevada,  Oregon,  Utah  and 
Washington,  to  17.3  per  cent,  in  Connecticut,  Maine 
and  Rhode  Island.^  Another  computation  based  on 
returns  of  13  important  railroad  systems  showed  a 
variation  in  ratio  of  taxes  to  gross  earnings  ranging 
*  "The  (London)  Times  American  Railway  Number,"  1912,  p.  30. 


220       AMERICAN  RAILROAD  ECONOMICS 

from  2.5  per  cent,  on  the  Erie  Railroad  system,  to 
6.3  per  cent,  on  the  New  York,  New  Haven  &  Hart- 
ford property.  A  few  states,  particularly  Connect- 
icut, base  taxes  on  market  value  of  the  shares  of 
the  taxed  corporation.  When  the  securities  com- 
mand higher  prices  the  taxes  are  greater.  There  is 
a  tendency  in  some  cases  to  lighten  the  taxes  of  non- 
dividend  paying  railroads.  Moreover,  prevailing 
publicity  of  railroad  accounts  would  seem  to  enable 
public  oflScials  to  judge  properly  the  net  earning 
power  of  each  railroad  and  what  is  a  reasonable 
assessment  for  taxation. 

For  their  own  convenience  and  in  order  to  show 
the  portion  of  their  revenues  assessed  for  govern- 
mental purposes,  a  number  of  railroads  compute 
their  annual  tax  payments  as  a  percentage  of  gross 
earnings.  In  view  of  the  fact,  however,  that  some 
states  base  tax  rates  on  the  average  ^^fer  mile'* 
valuation  of  railroad  property,  a  "per  mile  of  road'' 
computation  is  also  used.  There  can  be  uq  doubt 
that,  notwithstanding  the  enhancement  in  the  value 
of  railroad  property  and  the  almost  uninterrupted 
expansion  in  railroad  earnings,  heavier  taxation  is 
becoming  an  increasing  burden  to  the  companies. 
Even  though  railroad  net  income  may  not  be  seri- 
ously impaired  thereby,  railroad  shareholders  suffer 
a  permanent  loss. 


I 


CHAPTER  X 

NET   INCOME   AND   ITS   DISTRIBUTION 

Operating  Income.  *^ Operating  Income"  as  indi- 
cated on  page  187  is  the  balance  after  the  deduction 
of  ''Taxes"  from  ''Net  Operating  Revenues**  The 
item  represents  the  financial  result  obtained  from 
the  direct  operation  of  the  railroad  property,  with- 
out reference  to  investment  or  to  other  activities, 
and  without  deduction  of  capital  charges  in  the  form 
of  interest,  rentals  and  dividends.  It,  therefore, 
purports  to  exhibit  the  net  earning  capacity  of  a 
railroad  as  an  operating  company.  If  American 
railroad  corporations  had  confined  their  activities  to 
operating  "rail"  transportation  facilities  directly 
under  their  own  corporate  organizations,  the  "Oper- 
ating Income"  would  be  the  item  in  the  Income  Ac- 
count attracting  the  closest  interest  of  security 
holders.  From  this  "balance"  alone  would  come  the 
interest  and  dividend  payments.  However,  because 
of  the  acquisition  of  legally  independent  and  sepa- 
rately operated  lines,  and  because  of  the  develop- 
ment of  activities  not  directly  connected  with  or 
incidental  to  transportation,  additional  sources  of 
revenue  are  added  from  which  payments  for  the 
use  of  capital  are  drawn. 

"Other    Income"      Attention    has    already    been 

221 


m      AMERICAN  RAILROAD  ECONOMICS 


called  to  the  fact  that  American  railroad  companies 
are  holding  concerns,  owning  securities  of  other  com- 
panies as  well  as  operating  directly  their  own  cor- 
porate lines.  The  results  of  these  investment  ac- 
tivities affect  financial  progress  as  much  as  the  direct 
railroad  operating  results.  In  fact,  the  ownership 
of  subsidiaries  affords  opportunities  of  misinterpre- 
tation of  equities  and  earning  power.  For  this  reason, 
it  is  frequently  necessary  to  combine  the  accounts  of 
railroad  companies  comprising  a  "system"  in  order 
to  properly  determine  the  actual  earnings  and  finan- 
cial condition  of  the  parent  or  holding,  company. 

The  New  York  Central  system  furnishes  an  illus- 
tration. An  analysis  of  the  surplus  earnings  of  the 
New  York  Central  lines  for  the  calendar  year  1910 
reveals  the  following. 


Year  ended  December  31, 1910 


New  York  Central 

Lake  Shore 

Michigan  Central 

Pittsburgh  &  Lake  Erie 

Chicago,  Indiana  &  Southern 

New  York,  Chicago  &  St.  Louis 

Monongahela  Railroad 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis 


Surplus  for 
the  year  ^ 


New  York 

Central's 

Equity 


$  924,914 

$  924,914 

4,883,065 

4,394,758 

593,051 

533.745 

89,906 

44,953 

314,798 

283,318 

639,823 

301,914 

30,245 

96,804 

34,371 

20,124 

$7,910,173      $6,600,530 


According  to  the  above  computation,  the  surplus 
remaining,  after  all  charges  and  dividends  of  the 

*  After  dividend  payments. 


NET  INCOME  AND  ITS  DISTRIBUTION    223 

New  York  Central  Lines,  amounted,  approximately, 
to  3  per  cent,  of  $222,724,400  New  York  Central 
outstanding  stock.  This,  combined  with  the  6  per 
cent,  dividend  paid  to  New  York  Central  stock- 
holders, would  have  permitted  a  dividend  of  9  per 
cent,  on  New  York  Central  stock.  Confining  the 
computation  to  the  undistributed  surplus  of  the 
Lake  Shore  and  the  Michigan  Central  lines,  the 
surplus  profits  available  for  New  York  Central  stock 
would  be  in  the  neighborhood  of  8  per  cent.,  instead 
of  6  per  cent,  as  exhibited  in  the  parent  company's 
own  income  statement.  ^ 

It  is  readily  apparent  that  a  company  controlling 
other  railroads  through  stock  ownership  can  arbi- 

1  The  following  table  shows  the  dividends  earned  by  the  Lake  Shore 
and  the  Michigan  Central  companies  on  their  respective  capital  stocks 
since  1905,  together  with  dividends  paid,  and  the  equity  of  New  York 
Central  in  the  surplus  remaining  after  dividends.  This  equity  is  com- 
puted in  percentage  of  New  York  Central's  outstanding  stock. 


Lake  Shore 

Michigan  Central 

Yv,AR 

Approx. 

Approx. 

Am't 

Div. 

equity  of 

Am't 

Div. 

equity  of 

Earned 

Paid 

N.  Y.  Central 
in  surplus 

Earned 

Paid 

N.  Y.  Central 
in  surplus 

1912 

32.2% 

18% 

3^0% 

14.6% 

6% 

0.7% 

1911 

28.6 

18 

2.2 

11.3 

6 

0.4 

1910 

27.7 

18 

1.9 

7.8 

6 

0.14 

1909 

26.1 

12 

2.9 

15.8 

6 

0.7 

1908 

18.4 

12 

1.3 

8.6 

6 

0.2 

1907 

25.0 

14 

2.2 

9.2 

8 

0.1 

1906 

24.0 

8 

3.2 

5.2 

5 

0.0 

224       AMERICAN  RAILROAD  ECONOMICS 

trarily  draw  on  the  profits  and  surplus  of  its  subsid- 
iaries. A  correct  computation  of  earning  power  is 
not  limited  to  analysis  of  the  parent  company's 
accounts.  The  subsidiaries  must  also  be  closely 
examined  to  ascertain  whether  the  income  credited 
to  security  holdings  represents  a  proper  application 
of  the  surplus  earnings  of  the  controlled  corporation. 
Income  may  be  credited  without  being  earned,  and 
it  may  be  earned  and  not  credited. 

The  Denver  and  Rio  Grande  Railroad  in  1910 
furnishes  an  instance  of  a  possible  misinterpretation 
of  an  income  statement,  through  adding  to  income 
accrued,  but  unpaid,  interest  on  securities  of  a  sub- 
sidiary company.  Entirely  in  conformity  with  the 
Interstate  Commerce  Commission's  rules  and  re- 
quirements, the  year's  interest  accrual  of  $1,152,844 
on  Denver  &  Rio  Grande's  Western  Pacific  Second 
Mortgage  Bonds  was  credited  as  income.  As  this  in- 
terest was  not  actually  paid,  it  is  held  as  a  "deferred 
asset."  By  reckoning  in  this  fictitious  revenue  the 
Denver  and  Rio  Grande  could  have  carried  for- 
ward a  surplus  of  $1,552,000  instead  of  reporting  an 
actual  credit  of  approximately  $400,000.  For  doing 
exactly  this,  many  railroads  have  come  under  the 
severest  criticism  in  the  past.  The  ultimate  outcome 
in  some  cases  was  the  requirement  of  receivers. 

A  great  American  railroad  system  which  is  partic- 
ularly prominent  because  of  its  investment  activi- 
ties is  the  Union  Pacific  Railroad.  The  policy  of  the 
late  Mr.  Harriman  in  developing  and  extending 
Union  Pacific  lines  and  in  preventing  advantages 


NET  INCOME  AND  ITS  DISTRIBUTION    225 

to  other  transcontinental  railroads*  was  through  ac- 
quisition of  large  blocks  of  stocks  in  competing  and 
connecting  systems.  These  and  other  investment 
holdings  amounted  in  1911  to  a  book  value  in  the 
neighborhood  of  $260,000,000.  The  income  from 
this  source  was  $18,398,000,  compared  with  net 
operating  revenue  (before  deduction  of  fixed  charges) 
of  $35,711,000.  The  Union  Pacific's  big  return  from 
stocks  of  other  roads  held  in  its  treasury  has  been 
responsible  for  a  good  deal  of  misconception  as  to 
the  earning  power  of  the  railroad  property.  As  a 
matter  of  fact,  that  company's  return  on  its  capital 
stock  as  measured  by  its  own  railroad  operations  is 
not  large.  In  1912,  it  was  slightly  more  than  one- 
half  the  amount  needed  for  its  10  per  cent,  common 
stock  dividends.  Up  to  1912,  it  was  customary  for 
the  Union  Pacific  to  pay  6  per  cent,  on  its  common 
stock  from  transportation  earnings.  The  remaining 
4  per  cent,  in  dividends  was  charged  directly  against 
income  from  securities  owned. 

Deductions  from  Corporate  Income.  These  in- 
clude Rentals,  Interest  and  Sinking  Fund  payments 
and  are  familiarly  known  as  the  "Fixed  Charges." 
Attention  has  already  been  called  to  the  fact  that 
under  Interstate  Commerce  Commission  classifica- 
tion, the  item  "  Taxes  "  is  deducted  directly  from  the 
Net  Operating  Revenue,  It  is,  therefore,  not  among 
"fixed  charges."  Taxes  are  a  fixed  expense,  however, 
and,  for  purposes  of  analysis,  may  be  conveniently 
grouped  with  Rentals,  Interest  and  Sinking  Fund 
payments. 


226      AMERICAN  RAILROAD  ECONOMICS 

Rentals  represent,  in  addition  to  car-hire  expense, 
the  periodical  payments  for  lease  or  use  of  railroad 
lines,  terminals  and  other  facilities  and  are  there- 
fore analogous  to  interest  payments.  The  arrange- 
ments under  which  one  railroad  operates  or  uses 
the  facilities  of  another  railroad  are  matter  of  con- 
tract. Frequently,  the  rental  is  nothing  more  than 
an  agreement  to  guarantee  the  payment  of  stipu- 
lated rates  on  part  or  all  of  the  securities  of  the  leased 
concern.  In  other  instances  no  fixed  rental  is  speci- 
fied but  the  surplus  earnings  of  the  leased  line  may 
be  distributed  or  apportioned  between  the  owners 
and  the  lessee  according  to  fixed  agreement.  Under 
this  arrangement  the  rental  is  not  essentially  a  fixed 
charge  though  classed  under  ''Deductions  from  In- 
come" 

The  nature  of  railroad  interest  charges  requires 
little  explanation.  These  are  generally  more  'fixed' 
in  character  than  the  other  deductions  from  net 
income.  The  amount  each  year,  accordingly,  can 
be  calculated  in  advance.  As  pointed  out  on  page  41 
a  few  railroads  have  income  bonds  outstanding  the 
interest  on  which  is  not  required  to  be  paid  unless 
earned.  This  provision  would  seem  to  remove  the 
payments  on  these  obligations  from  the  category  of 
"Fixed  Charges."  There  are  only  a  very  few  issues 
of  income  bonds,  however,  and  no  separate  classifica- 
tion is  made  for  their  interest  charge  in  the  Income 
Account,  Similarly,  the  interest  paid  on  unfunded 
indebtedness,  as  well  as  the  cost  of  exchange  and 
discount  transactions  are  included  among  the  "D^- 


NET  INCOME  AND  ITS  DISTRIBUTION    227 

ductions  from  Income^'  along  with  the  fixed  interest 
charges  on  capital  securities. 

Sinking  fund  and  other  amortization  charges  are  a 
relatively  unimportant  item  among  the  Deductions 
from  Net  Income.  Railroads,  as  a  rule,  make  no 
substantial  provisions  for  debt  amortization.  The 
exception  is  in  the  case  of  "car  trust"  indebtedness 
in  which  a  part  of  the  principal  is  paid  off  periodically 
so  as  to  be  wholly  amortized  before  the  equipment 
is  worn  out. 

The  amortization  of  discount  on  funded  debt  is  also 
an  item  under  Deductions  from  Net  Income,  Refer- 
ence has  already  been  made  to  the  regulations  of 
the  Interstate  Commerce  Commission  whereby  the 
periodical  amortization  is  proportioned  equally 
throughout  the  interval  between  the  date  of  sale  and 
the  date  of  maturity  of  the  obligations  on  which 
the  discount  expense  was  incurred.  However,  if 
the  company  desires  to  extinguish  the  discount 
sooner,  it  may  do  so  at  its  own  option  through  a 
charge  against  Profit  &  Loss.  As  long  as  any  of 
the  discount  is  unextinguished,  a  proportionate 
charge  must  be  made  against  annual  income  suflScient 
to  amortize  the  discount  during  the  interval  in 
which  the  funded  debt  remains  outstanding. 

The  miscellaneous  items  included  by  the  Inter- 
state Commerce  Commission  under  ''  Deductions  from 
Income^'  are  not  of  sufficient  general  importance 
to  require  description  here.  The  investor,  however, 
should  examine  the  items  carefully  to  ascertain  in 
each  case  the  exact  nature  of  the  liabilities  charged 


228      AMERICAN  RAILROAD  ECONOMICS 

against  current  earnings.  Notwithstanding  oiOficial 
regulations  there  are  possibiHties  of  omitting  or 
understating  charges  or  losses  which,  in  accordance 
with  correct  accounting  principles,  should  be  in- 
cluded under  the  '' Deductions  from  Net  Income'' 
Among  these  are  the  so-called  "contingent  obliga- 
tions" arising  either  from  the  guarantee  of  interest 
and  dividends  on  subsidiary  company  securities  or 
from  the  income  deficits  of  railroads  and  other  con- 
cerns which  are  owned  but  operated  separately  or 
which  are  controlled  through  majority  stock  owner- 
ship. Liabilities  of  this  character  demand  atten- 
tion. Control  of  subsidiaries  is  more  often  for  the 
purpose  of  furnishing  traffic  to  the  main  lines  than 
for  direct  pecuniary  gain.  Consequently,  the  operat- 
ing deficits  of  such  "feeders'*  are  as  properly  a 
charge  against  the  general  net  earnings  for  the  period 
in  which  they  accrue  as  is  the  interest  paid  on  capi- 
tal utilized  directly  in  increasing  traffic.  However, 
because  these  charges  are  not  "fixed"  or  regularly 
recurrent  and  do  not  appear  on  the  books  of  the 
parent  company  they  are  frequently  omitted  in 
income  calculations.  There  are  instances,  however, 
in  which  railroad  companies  regularly  take  into  their 
income  account  their  proportionate  share  of  deficits 
in  the  operations  of  a  controlled  road.  The  Colorado 
&  Southern  Railroad,  for  example,  jointly  with  the 
Rock  Island  system,  owns  the  stock  of  the  Trinity  & 
Brazos  Valley  Railroad,  a  line  furnishing  to  both 
systems  an  outlet  to  the  Gulf  of  Mexico.  The  net 
earnings  of  the  Trinity  &  Brazos  Valley  have  been 


NET  INCOME  AND  ITS  DISTRIBUTION    229 

insufficient  to  pay  its  fixed  charges.  Each  of  the 
parent  companies,  therefore,  assumes  one-half  of 
the  annual  deficit.  During  the  last  four  years,  this 
deficit  has  been  in  the  neighborhood  of  $1,000,000 
annually. 

The  Yazoo  &  Mississippi  Valley,  whose  stock  is 
held  by  the  Illinois  Central  Railroad  is  an  instance 
of  the  operation  of  a  controlled  line  which  frequently 
shows  an  annual  deficit  after  deduction  of  charges 
against  income.  In  this  case  the  Illinois  Central  is 
not  required  to  carry  the  loss  into  its  own  income 
account.  The  deficits  are  not  regularly  recurrent. 
Moreover,  the  Yazoo  &  Mississippi  Valley  has  a 
Profit  (&  Loss  surplus  against  which  operating  losses 
may  be  charged. 

Net  Corporate  Income  and  the  Margin  of  Safety. 
After  the  deduction  of  all  proper  charges  against 
current  income,  the  surplus,  if  any,  can  be  disposed 
of  in  accordance  with  the  judgment  of  the  com- 
pany's directors.  This  surplus  is  designated  by  the 
Interstate  Commerce  Commission  as  *^  Net  Corporate 
Income,'*^  Considered  in  relation  to  the  funded  obli- 
gations outstanding,  this  item  determines  to  some 
extent  the  investment  values  of  these  securities. 
Considered  solely  with  reference  to  the  interest  re- 
quirements, it  is  commonly  termed  the  *^  Margin  of 
Safety. ^^  Thus,  if  a  company  has  but  one  bond  issue 
bearing  an  annual  interest  requirement  of  $100,000, 
and  the  Net  Corporate  Income  (after  all  fixed  charges 
and  reserve  requirements)  for  a  series  of  years  is 
approximately  $100,000  annually,  the  *^  Margin  of 


230       AMERICAN  RAILROAD  ECONOMICS 

Safety"  is  said  to  be  100  per  cent.  Most  railroad 
companies  however,  have  a  number  of  different  bond 
issues  ranging  in  priority  as  to  claim  upon  net  in- 
come, and  the  ''Margin  of  Safety''  is  frequently 
calculated  with  reference  to  each  issue.  The  relative 
market  standing,  other  things  being  equal,  is  largely 
gauged  by  the  size  of  the  ratio.  Thus,  the  First  Con- 
solidated Mortgage  5  per  cent.  Bonds  of  the  South- 
ern Railway,  having  claim  upon  net  income  prior  to 
several  other  direct  funded  obligations  of  the  com- 
pany, with  a  margin  of  safety  in  1912  of  about  500 
per  cent.,  have  sold  at  101  when  the  Development  & 
General  Mortgage  4  per  cent.  Bonds,  which  are  not 
so  well  secured,  sold  at  slightly  less  than  72.  The 
difference  in  the  interest  rate,  therefore,  does  not 
fully  account  for  the  disparity  in  price.  Similarly, 
the  First  Mortgage  5  per  cent.  Gold  Bonds  of  the 
Wabash  Railroad  sold  in  January,  1912,  as  high  as 
lOTJ/^,  whereas,  the  First  &  Refunding  Gold  4  per 
cent.  Bonds  of  the  company,  on  wliich  the  interest 
requirements  were  at  the  time  barely  met  from  net 
earnings,  sold  around  56. 

The  question  as  to  an  "ideal"  Margin  of  Safety  in 
the  analysis  of  railroad  income  statements  is  of 
purely  academic  interest.  The  wide  disparities  in 
operating  conditions  affecting  income  stability  do 
not  permit  the  establishment  of  a  definite  rule.  It 
is  evident  from  the  relative  market  prices  of  railroad 
securities,  that  a  margin  of  25  per  cent,  above  fixed 
charges  in  one  railroad  company's  income  statement 
is  a  better  basis  of  security  value  than  a  50  per  cent. 


NET  INCOME  AND  ITS  DISTRIBUTION    231 

margin  of  another  line.  Thus,  the  Boston  &  Maine 
Railroad  in  the  fiscal  year  1911  had  a  margin  of 
safety  of  but  23  per  cent,  above  its  fixed  interest 
requirements,  whereas  the  Erie  Railroad  had  a 
margin  of  53  per  cent.  It  would  be  difficult  to  argue 
that  Erie's  bonds  have  a  better  investment  value 
than  similar  issues  of  the  Boston  &  Maine.  The 
same  is  true  when  comparison  is  made  between  the 
Margin  of  Safety  of  the  Union  Pacific  securities  and 
those  of  the  Lake  Shore  and  Michigan  Southern 
system.  The  former  has  been  earning  its  interest 
charges  four  times  over,  whereas,  the  charges  of  the 
Lake  Shore  were  hardly  trebled.  Stability  of  earn- 
ings is  a  factor  in  market  values  eliminating  the 
necessity  of  a  large  Margin  of  Safety, 

Distribution  of  Corporate  Net  Income.  The  sur- 
plus income  remaining  after  all  *' fixed"  and  neces- 
sary charges  is  available  for  shareholders'  dividends. 
Dividend  distribution,  however,  as  already  men- 
tioned, is  largely  discretionary  with  each  company's 
directors.  The  financial  policy  of  standard  American 
railroads  differs  from  that  of  the  English  companies 
in  which  earnings  are  divided  "up  to  the  hilt"  among 
shareholders,  and  nothing  is  reserved  for  permanent 
improvements  or  for  contingencies.  In  the  United 
States  vast  sums  taken  from  income  have  been 
"turned  back  into  the  property."  The  stockholders 
thus  do  not  reap  the  immediate  and  direct  benefit 
represented  by  the  earning  power  back  of  their  secur- 
ities. The  Pennsylvania  Railroad's  directors  for 
many  years  are  said  to  have  adhered  to  the  dictum. 


232      AMERICAN  RAILROAD  ECONOMICS 

"A  dollar  for  improvements  for  each  dollar  in  divi- 
dends.'* Through  this  means  they  have  built  up 
an  aggregate  surplus  of  more  than  $100,000,000 
(which  does  not  include  the  surplus  accounts  of  its 
subsidiaries).  In  addition,  large  sums  have  been 
put  into  property  directly  through  charges  to  operat- 
ing expenses.  The  Chicago,  Burlington  &  Quincy 
has  likewise  accumulated  through  earnings  a  surplus 
of  over  $60,000,000,  applied  largely  to  permanent 
improvements  and  additions.  The  Atlantic  Coast 
Line  during  the  decade  ended  June  30,  1912,  had 
net  earnings  available  for  dividends  of  $48,292,000, 
of  which  only  about  one-half  was  paid  to  stock- 
holders. The  remainder  served  as  additional  capital 
for  railroad  operations. 

Guided  by  the  success  of  this  policy,  several  of 
the  less  prosperous  companies,  though  showing  sur- 
plus earnings  sufficient  for  dividend  payments,  have 
been  withholding  a  full  distribution  to  shareholders 
in  order  to  strengthen  their  finances  and  credit. 
For  example,  the  Erie  had  surplus  net  income  in  the 
fiscal  year  1911  sufficient  to  meet  the  preferred  divi- 
dend requirements  and  to  pay,  in  addition,  a  divi- 
dend of  2.5  per  cent,  on  its  common  stock,  but  no 
class  of  shareholders  participated  in  a  distribution. 
In  the  same  year,  the  Southern  Railway  also  had  a 
surplus  above  fixed  charges  of  $6,670,000,  of  which 
but  $1,200,000  (a  dividend  of  2  per  cent.)  was  paid 
to  preferred  shareholders,  the  remainder  having  been 
applied  to  strengthen  the  financial  position  of  the 
company.     A  conservative  dividend  policy  of  this 


NET  INCOME  AND  ITS  DISTRIBUTION    233 

sort  is  expected  to  enhance  the  intrinsic  merits  of  the 
shares  of  such  companies  even  though  the  owners 
are  receiving  no  immediate  return. 

It  is  thus  a  common  practice  among  American 
railroad  companies  to  apply  each  year  a  part  of  the 
Net  Corporate  Income  directly  to  the  uses  of  the 
property.  Sums  so  set  aside  are  called  '^Appropria- 
tions from  Income."  In  accordance  with  Interstate 
Commerce  Commission  regulations  these  appropria- 
tions are  to  be  permanently  credited  to  an  account 
called  '^ Appropriated  Surplus"  so  as  to  be  distin- 
guished from  the  '* Profit  &  Loss"  Surplus. 

The  purpose  of  withholding  a  full  distribution  of 
the  Net  Corporate  Income  from  shareholders  is  to 
prevent  a  large  increase  in  capital  obligations.  In 
this  way  the  railroad's  credit  is  improved.  The  late 
President  McCrea,  of  the  Pennsylvania  Railroad, 
testifying  before  the  Enginemen's  Wage  Arbitration 
Board  of  1912,  said: 

The  basis  of  a  company's  credit  is  what  it  has  over  at  the  end  of  the 
year,  after  having  made  a  reasonable  return  on  the  capital  already  in- 
vested. That  is  because  when  you  want  to  borrow  money,  or  sell  your 
stock,  those  who  want  to  buy  or  are  going  to  buy  want  to  know  whether 
there  is  enough  margin  to  carry  you  over  and  to  pay  returns  on  the  money 
they  are  advancing  until  it  can  be  made  to  pay  itself. 

Today  we  are  spending  a  great  deal  of  money  on  which  we  can  never 
expect  to  get  an  adequate  return,  really  any  return,  or  if  we  do,  it  is  so 
small  or  so  indefinite  that  it  is  very  hard  to  describe  just  what  it  will  be. 
All  of  that  is  naturally  known,  and  the  investor  must  be  assured  that  he 
is  going  to  get  a  return  on  what  he  invests. 

The  standard  railroads  of  America  have  been 
enabled  to  develop  and  expand  without  State  guar- 


234      AMERICAN  RAILROAD  ECONOMICS 

anty  of  interest  charges  and  without  excessive  capital 
obligations  largely  because  of  this  so-called  "Amer- 
ican financiering  policy"  which  aims  to  maintain 
the  company's  credit  by  developing  the  property 
from  surplus  earnings  and  not  by  increased  capitali- 
zation. It  may  be  safely  said  that  only  because  of 
the  enormous  expenditures  made  from  current  in- 
come for  new  railroad  construction  and  for  additions 
and  betterments  the  leading  railroad  systems  have 
succeeded  in  maintaining  or  increasing  the  return  to 
shareholders. 

The  superiority  of  the  American  system  is  mani- 
fest when  contrasted  with  the  methods  of  British 
railroads.  The  latter  charge  revenue  with  only  the 
amount  necessary  to  keep  the  line  at  its  original 
efficiency;  practically  all  additions  to  rolling  stock 
and  all  kinds  of  extensions  and  betterments  are 
charged  to  capital.  After  that,  the  profits  are  di- 
vided among  security  holders.  This  policy  has  re- 
sulted in  enormous  increase  of  British  railroad  capi- 
talization and  a  consequent  diminution  in  market 
value  of  their  shares.^ 

THE   PROFIT   &    LOSS   ACCOUNT 

The  foregoing  discussion  of  the  principal  items  in 
the  Income  Account  gives  occasion  for  only  a  brief 
description  of  the  Profit  &  Loss  Account,     In  the 

*  See  W.  M.  Acworth,  "Railroad  Accounting  in  America  vs.  England," 
North  American  Review,  March,  1910;  also  a  paper  by  the  author, 
"Control  of  Railroad  Accounts  in  Leading  Eurqjean  Countries,"  Quar- 
terly Journal  of  Economics,  May,  1910. 


NET  INCOME  AND  ITS  DISTRIBUTION    235 

language    of    the    Interstate    Commerce   Commis- 
sion: 

The  Profit  and  Loss  Account  summarizes  the  changes  in  the  corporate 
surplus  or  deficit  during  a  given  fiscal  period  resulting  from  the  operations 
and  business  transactions  during  that  period  as  well  as  changes  effected 
by  appropriations  of  surplus  made  at  the  option  of  the  company,  by  ac- 
counting adjustments  not  property  attributable  to  the  period,  or  by 
miscellaneous  losses  or  gains  not  provided  for  elsewhere. 

The  Profit  and  Loss  Account  is  the  connecting  link  between  the 
Income  Account  and  the  General  Balance  Sheet,  and  the  total  balance 
in  the  account  should  therefore  be  shown  in  the  General  Balance  Sheet 
Statement.^ 

The  necessity  of  a  permanent  Profit  &  Loss  Ac- 
count is  due  to  conditions  which  prevent  the  definite 
allocation  or  distribution  of  all  gains  and  losses  to  a 
specific  period.  The  account,  however,  is  not  in- 
tended to  cover  every  item  of  income  or  expense 
which  overlaps  from  one  year  to  another  and  which 
cannot  be  fully  determined  in  each  period.  It  is  in- 
tended primarily  for  extraordinary  and  seriously 
delayed  transactions  which  at  the  time  they  are 
finally  entered  on  the  books  have  no  relation  to 
current  business. 

Probably  no  better  illustration  of  the  use  of  the 
Profit  &  Loss  Account  is  afforded  than  that  in  con- 
nection with  the  abandonment  of  property.  It  was 
pointed  out  on  page  183  that  in  accordance  with 
Interstate  Commerce  Commission  regulations  the 
value  of  property  abandoned  incidentally  in  the  mak- 
ing of  additions  and  betterments  is  a  charge  against 
revenues  and  not  against  accumulated  surplus. 
Under  this  ruling  no  part  of  the  losses  from  prop- 

*  "Form  of  the  Income  and  Profit  and  Loss  Statement,"  First  Issue,  p.  9. 


236       AMERICAN  RAILROAD  ECONOMICS 

erty  abandoned  because  of  the  construction  of  new 
sections  of  roadbed  or  track,  or  of  new  buildings, 
would  be  entered  in  the  Profit  &  Loss  Account, 
However,  in  the  case  of  property  abandoned  without 
replacement  of  any  hind,  the  loss  is  entered  directly 
in  the  Profit  <Sc  Loss  Account  Though  the  net  result 
to  the  railroad  company  is  the  same  whichever 
method  is  used,  the  effect  on  the  market  value  of 
securities  is  vastly  more  pronounced  when  the  loss 
is  deducted  from  current  income  instead  of  from 
the  Profit  d;  Loss  Surplus,  The  impairment  of  net 
income  in  any  one  year  may  necessitate  a  temporary 
reduction  in  the  dividend  rate  which  is  an  influential 
factor  of  market  value. 

Extraordinary  payments  other  than  losses  through 
abandonment  of  property  are  entered  in  the  Profit  & 
Loss  Account,  Thus,  it  is  permissible  for  a  railroad 
company,  at  its  option,  to  charge  all  or  a  part  of  dis- 
count on  funded  debt  to  Profit  &  Loss,  thereby  ex- 
tinguishing or  reducing  this  charge  against  annual 
income  during  the  period  of  the  indebtedness.^  The  ^ 
cost  of  extensions,  improvements  and  betterments r 
may  likewise  be  deducted  directly  from  Profit  <^ 
Loss,  The  amounts  thus  deducted,  however,  be- 
come a  part  of  the  *' Appropriated  Surplus,^^  and  the 
transaction  is  merely  a  bookkeeping  entry.  A  rail- 
road company's  accumulated  surplus  representing 
net  proprietorship,  therefore,  is  separated  into  two 
parts:  the  '^Appropriated^'  Surplus  which  cannot 
be  arbitrarily  withdrawn  or  reduced,  and  the  "Profii 

1  See  pp.  180-181. 


NET  INCOME  AND  ITS  DISTRIBUTION    237 

&  Loss"  Surplus,  which  is  the  reservoir  for  meeting 
extraordinary  losses  and  dividends,  and  to  which  cur- 
rent surplus  profits  and  extraordinary  gains  are  added. 

A  railroad  has  the  option  of  charging  any  divi- 
dends to  Profit  &  Loss  or  to  current  income.  The 
Louisville  &  Nashville,  the  Chesapeake  &  Ohio,  the 
Lehigh  Valley  and  a  number  of  other  railroads 
regularly  pay  dividends  from  Profit  &  Loss  Surplus 
instead  of  charging  them  in  the  Income  Account. 
It  would  seem  that  under  ordinary  circumstances 
dividend  deductions  made  from  one  account  would 
preclude  deductions  for  like  purposes  from  the 
other.  This,  however,  is  not  the  case.  The  Chicago, 
Milwaukee  &  St.  Paul  Railroad's  first  semi-annual 
dividend  for  the  fiscal  year  1911  on  both  the  Preferred 
and  Common  Stock  was  entered  in  the  Income  Ac- 
count, whereas,  the  second  semi-annual  payments 
appear  as  deductions  in  the  Profit  &  Loss  Account, 
This  may  have  been  due  to  the  fact  that  the  full 
amount  of  the  dividends  consumed  the  total  Net 
Corporate  Income  available  for  this  purpose,  and 
in  order  to  avoid  showing  a  "deficit"  the  second 
semi-annual  disbursements  were  charged  against 
the  accumulated  surplus.  Transactions  of  this  kind, 
rendered  necessary  by  accounting  exigencies,  are 
apt  to  mislead  the  layman  desirous  of  knowing  the 
actual  financial  results  of  railroad  operations. 

As  illustrating  items  in  a  railroad  Profit  &  Loss 
Account,  the  following  example  from  an  annual  re- 
port of  the  Chicago  &  North  Western  Railway  Com- 
pany is  presented: 


238      AMERICAN  RAILROAD  ECONOMICS 


Profit  and  Loss  Account,  June  30,  1911 


DR. 

CR. 

Depreciation       ac- 

Balance,  June   30, 

crued     prior     to 

1910 $32,178,932.10 

July  1.  1907,  on 

Balance  Income  for 

equipment       re- 

Year ending  June 

tired  or  changed 

30, 1911,  brought 

from    one    class 

forward  from  In- 

to  another   dur- 

come Account .  . 

1.703,485.01 

ing    the    current 

Balance  from  oper- 

fiscal year 

$1,282,296.73 

ations    of    Land 
Properties       for 
year  ending  June 

30,  1911 

522.145.69 

Discount  on  C.  & 
N.   W.   Ry.  4% 
General      Mort- 
gage Gold  Bonds 
of  1987  sold  dur- 
ing the  year 

825,000.00 

Amount  transferred 
from  "Appropri- 
ated Surplus"  on 
account    of    the 
retirement         of 
Madison    Exten- 
sion and  Menom- 
inee     Extension 
First     Mortgage 
Sinking        Fund 

Net  loss  on  prop- 

Bonds  

806,323.05 

erty  sold  or  aban- 

Balance of  accounts 

doned    and    not 

written    off    the 

replaced 

53,854.24 

books,  etc 

16,728.34 

Balance        Credit, 

June    30,     1911, 

carried    to    Bal- 

ance Sheet 

33,066,463.22 

$ 

$35,227,614.19 

55,227,614.19 

NET  INCOME  AND  ITS  DISTRIBUTION    239 

The  first  item  among  the  deductions  (left-hand 
side)  calls  for  explanation.  It  represents  losses  to 
the  company  due  to  the  depreciation  on  equipment 
prior  to  July  1,  1907,  This  depreciation  had  not 
been  charged  against  income  during  the  time  the 
depreciation  accrued,  A  valuation  must  be  placed 
by  the  railroad  on  equipment  retired  from  service 
or  reclassified  so  that  such  changes  can  be  entered 
on  the  books  of  account.  In  making  these  revalua- 
tions consideration  is  given  to  the  losses  due  to  use, 
i.  e.,  depreciation.  Now,  it  is  evident  that  all  of  this 
loss  did  not  occur  since  July,  1907,  when  the  Inter- 
state Commerce  Commission's  depreciation  ac- 
counts went  into  effect.  Consequently,  to  charge 
the  depreciation  of  years  prior  to  July,  1907,  to  the 
income  of  later  years  is  unfair  and  improper.  The 
money  value  of  the  depreciation  estimated  to  have 
accrued  in  the  earlier  years  is  therefore  deducted 
from  the  Profit  &  Loss  balance.  Under  modern 
bookkeeping  methods  this  is  the  only  proper  way  of 
accounting  for  losses  that  have  occurred  in  past 
periods,  but  had  not  been  entered  on  the  books. 

The  deduction  of  discount  on  bonds  of  the  com- 
pany sold  during  the  year  indicates  that  the  man- 
agement prefers  to  wipe  out  expenses  of  this  charac- 
ter instead  of  charging  the  income  of  each  year 
equally  during  the  time  the  bonds  are  outstanding. 
The  charging  of  the  Profit  &  Loss  Account  with  the 
net  loss  on  property  sold  or  abandoned  and  not  re- 
placed is  in  accord  with  the  regulations  of  the  In- 
terstate Commerce  Commission. 


240       AMERICAN  RAILROAD  ECONOMICS 

The  items  entering  into  the  Profit  &  Loss  Account 
as  additions  to  the  credit  balance  which  has  been 
carried  over  from  the  preceding  period  inchide,  first 
of  all,  the  surplus  income  for  the  year  transferred 
from  the  Income  Account,  The  second  item  is  the 
net  income  from  the  sale  and  operation  of  the  com- 
pany's "land  grant"  lands.  The  transactions  in 
connection  with  these  lands  are  entirely  apart  from 
railroad  operations.  Consequently,  in  accord  with 
Interstate  Commerce  regulations,  the  profit  may  be 
entered  in  the  Profit  &  Loss  Account.  The  fourth 
item  represents  merely  a  bookkeeping  transaction 
arising  from  the  redemption  of  bonds.  In  this  case 
a  part  of  the  surplus  of  the  Company  previously 
appropriated  is  again  made  available  for  adjust- 
ments of  loss  or  for  distribution  in  dividends.  The 
last  credit  item  requires  no  comment,  probably  repre- 
senting accounts  payable  for  which  demand  has 
not  been  made  or  is  not  expected  to  be  made. 

Summing  up  the  deductions  and  additions  to  the 
account,  the  Company  shows  a  net  gain  in  Profit  & 
Loss  for  the  year  of  $887,531.12  and  the  total  bal- 
ance $33,066,463.22  is  carried  forward  to  the  General 
Balance  Sheet, 


CHAPTER  XI 

THE  GENERAL  BALANCE  SHEET 

In  studying  railroad  financial  progress,  the  BaU 
ance  Sheet  as  a  rule  is  hurriedly  passed  over,  not 
because  it  is  less  important  than  the  Income  Account, 
but  because  it  is  less  readily  understood.  The  Gen- 
eral Balance  Sheet,  if  properly  compiled,  purports 
to  show  as  nearly  correctly  as  possible  a  company's 
financial  condition  as  determined  or  influenced  by 
operating  results  and  by  fiscal  changes  since  its 
corporate  organization.  It  is  thus  the  representation 
of  cumulative  effects,  whereas,  the  Income  Account 
is  merely  an  exhibit  of  the  results  of  a  year  or  even 
shorter  period.  The  General  Balance  Sheet,  there- 
fore, when  properly  interpreted,  furnishes  a  better 
indication  of  financial  status  and  of  investment  value 
than  current  earnings,  which  frequently  are  the  re- 
sult of  temporary  conditions. 

General  Survey  of  the  Balance  Sheet.  The  In- 
terstate Commerce  Commission's  prescribed  Con- 
densed General  Balance  Sheet  is  as  shown  opposite 
p.  240.  The  form  of  the  General  Balance  Sheet  here 
given  does  not  greatly  differ  from  the  form  prevailing 
previous  to  the  inauguration  of  uniform  railroad 
accounts.  The  items  are  now  stated  in  greater  de- 
tail and,  in  some  cases,  the  classification  is  slightly 

241 


242      AMERICAN  RAILROAD  ECONOMICS 

different  than  formerly.  The  Interstate  Commerce 
Commission  endeavors,  as  far  as  possible,  to  have  rail- 
road property  separated  from  the  other  items  in 
the  General  Balance  Sheet.  This  is  in  line  with  the 
policy  of  exhibiting  railroad  operations  distinct  from 
other  activities.  The  purpose,  however,  cannot  be 
fully  accomplished  until  there  is  a  complete  inven- 
tory of  each  company's  assets.  Acknowledgment 
of  this  fact  is  indicated  in  the  prescribed  General 
Balance  Sheet,  in  which  all  physical  property  is  in- 
cluded under  one  general  item  "Property  Invest- 
ment." 

The  assets  in  the  General  Balance  Sheet  are  placed 
under  six  groups:  (1)  Road  &  Equipment;  (^)  Se- 
curities; (3)  Other  Investments;  (4)  Working  Assets; 
(5)  Accrued  Income;  and  (6)  Deferred  Debit  Items. 
The  first  three  are  classed  as  "Property  Investment" 
and  are  technically  known  as  "fixed"  assets  because 
they  are  permanent  factors  of  the  enterprise.  The 
other  assets  are  called  "current"  or  "liquid"  assets 
because  the  identity  of  each  unit  is  constantly  con- 
verted and  interchanged  by  the  operations  of  the 
company.  The  last  general  group.  Deferred  Debit 
Items,  represents  chiefly  prepayments  or  claims  not 
yet  due.  These  include  prepaid  rent,  insurance  and 
taxes,  accrued  interest,  and  funds  held  apart  from 
the  general  assets  of  the  company  for  reserve  and 
sinking  fund  purposes. 

The  two  main  items  under  Road  &  Equipment,  it 
will  be  noticed,  are  distinguished  as  to  time  of  ac- 
quisition rather  than  as  to  class  of  property.    This 


THE  GENERAL  BALANCE  SHEET         243 

arises  from  the  fact  that  previous  to  the  Interstate 
Commerce  Commission's  accounting  regulations,  no 
compulsory  distinction  in  the  accounts  was  made 
with  reference  to  separate  value  of  road  and  of 
equipment.  In  most  cases  these  had  been  agglomer- 
ated in  a  "  Cost-of-Road  Account,"  Since  1907,  how- 
ever, new  acquisitions  of  physical  property  must 
be  classified  in  accordance  with  the  official  regula- 
tions under  (a)  Road,  (b)  Equipment  and  (c)  Gen- 
eral Expenditures.  Thus  we  see  that  in  the  General 
Balance  Sheet  here  selected  for  illustration  the 
investment  in  road  since  1907  amounts  to  $10,144,118 
and  the  investment  in  equipment,  $10,727,385. 
The  previous  investment  in  physical  property  is 
stated  at  $271,099,017. 

The  requirement  of  equipment  depreciation  ac- 
counts on  the  books  of  the  railroads  creates  a  new 
item,  '^ Reserve  for  Accrued  Depreciation,"  which  ap- 
pears in  the  General  Balance  Sheet  as  a  deduction 
from  *^Road  and  Equipment."  This  reserve  repre- 
sents the  unextinguished  charge  against  income 
since  1907  to  cover  accrued  depreciation  of  equip- 
ment in  the  service  of  the  company. 

The  second  main  item  under  Property  Investment, 
viz.:  "Securities  Owned"  represents  the  company's 
own  unsold  funded  indebtedness  and  the  security 
holdings  in  other  railroads  or  kindred  undertakings. 
All  these  are  classified  into  three  categories — (1)  Se- 
curities of  Proprietary,  Affiliated  and  Controlled  Com- 
panies— Pledged,  (2)  Securities  Issued  or  Assumed — 
Pledged,  and  (3)  Securities  of  Proprietary,  Affiliated 


244       AMERICAN  RAILROAD  ECONOMICS 

and  Controlled  Companies — Unpledged.  The  basis 
of  this  classification  is  discussed  on  page  251. 

The  item  "Investments'^  in  the  General  Balance 
Sheet  is  sub-divided  into  (1)  Advances  to  Proprietary 
Affiliated  and  Controlled  lines  for  Construction,  Equip- 
ment and  Betterment,  and  (2)  Miscellaneous  Invest- 
ments, Under  the  first  are  included  only  advances 
made  for  capital  expenditure.  Temporary  and  cur- 
rent loans  are  under  "Deferred  Debit  Items.''  Mis- 
cellaneous Investments  comprise  the  cost  of  securities 
of  concerns  other  than  transportation  or  kindred 
enterprises.  They  are  the  equities  in  the  "extran- 
eous undertakings"  and  "outside  properties"  of 
the  railroad  companies. 

The  Working  Assets  are  the  available  cash  or 
cash  equivalents  together  with  the  materials  needed 
in  current  operations.  As  already  mentioned,  these 
items  undergo  constant  change,  being  either  ex- 
pended or  consumed,  or  converted  into  the  fixed 
assets. 

The  classification  of  the  liabilities  corresponds 
very  closely  to  that  of  assets.  The  Capital  Stock 
and  the  Bonded  Indebtedness  are  set  opposite  the 
Property  Investment,  and  the  Working  Liabilities  are 
an  offset  to  the  Working  Assets.  The  Accrued  Lia- 
bilities not  Du£  together  with  the  Deferred  Credit 
Items  are  accounts  of  the  same  nature  as  the  De- 
ferred Debit  Items.  The  Surplus  accounts  (which 
include  the  Profit  &  Loss  balance),  however,  have 
no  distinctive  countervailing  item  among  assets. 
In  fact,  the  Surplus  is  merely  an  item  balancing 


THE  GENERAL  BALANCE  SHEET         245 

assets  and  liabilities.  It  is  placed  on  the  asset  side 
of  the  General  Balance  Sheet  whenever  all  the  other 
liabilities  exceed  the  total  assets.  In  this  event  the 
net  ^proprietorship  (see  page  170)  represented  by 
the  Surplus  becomes  a  negative  quantity,  i.  e.,  a 
''deficit:' 

The  Capital  Stock  and  the  Bonded  and  Secured  Debt 
constitute  railroad  capitalization.  Herein  is  in- 
cluded all  funded  debt  which  has  a  matiu'ity  period 
of  not  less  than  a  year.  Thus,  as  pointed  out  in 
Chapter  II,  temporary  notes  which  are  issued  to  ma- 
ture in  one  or  more  years  are  a  part  of  railroad  capi- 
talization. 

Capital  Stock  is  classified  in  the  General  Balance 
Sheet  as  ''Common,"  "Pref erred''  and  "Debenture 
Stock."  The  Funded  Debt  is  also  classified,  six  separ- 
ate categories  having  been  established  by  the  Inter- 
state Commerce  Commission. 

Under  Working  Liabilities  are  included  items 
representing  debts  and  obligations  of  a  maturity  of 
less  than  one  year.  The  Accrued  Liabilities  not  Due 
are  items  which  have  already  been  charged  against 
income  but  which  have  not  been  actually  disbursed. 
The  Deferred  Credit  Items  cover  the  various  operating 
reserves  and  special  trust  funds  (except  the  Equip- 
ment Depreciation  Reserve  which  is  deducted  directly 
from  the  Property  Investment).  These  reserves 
have  been  accumulated  through  charges  to  Operat- 
ing Expenses.  They  are,  therefore,  separate  and 
distinct  from  sinking  funds,  and  from  other  reserves 
that  are  deductions  from  Net  Corporate  Income  or 


246      AMERICAN  RAILROAD  ECONOMICS 

from  Profit  Sc  Loss.  These  are  a  part  of  the  surplus 
which  as  previously  mentioned,  is  divided  into 
two  parts:  (1)  the  Appropriated  Surplus,  represent- 
ing appropriations  or  reserves  maintained  for  some 
definite  purpose,  and  (2)  the  Profit  &  Loss  balance, 
which  is  the  free  surplus  held  at  the  discretion  of 
the  company's  directors. 

Before  passing  to  a  detailed  analysis  of  the  items 
in  the  General  Balance  Sheet,  reference  should  be 
made  to  "contingent  liabilities,"  As  pointed  out 
on  page  228,  many  of  the  leading  railroad  companies 
guarantee  by  endorsement  the  obligations  of  sub- 
sidiaries. No  real  indebtedness  is  thus  assumed  un- 
less default  is  made  by  the  issuing  corporation.  The 
contingent  liability,  therefore,  is  not  taken  on  the 
books  of  the  parent  company  and  finds  no  place  in 
the  General  Balance  Sheet.  However,  a  foot-note 
attached  to  each  company's  financial  statements 
setting  forth  the  contingent  liabilities  would  assist 
the  purposes  of  publicity. 

Property  Accounts.  These  in  the  Balance  Sheet 
are  intended  to  be  a  statement  of  the  actual  invest- 
ment in  the  property.  The  failure  to  meet  this  pur- 
pose may  arise  from  various  causes.  Reference  has 
already  been  made  to  the  practice  of  a  number  of 
American  companies  of  charging  the  cost  of  a  large 
part  of  improvements  and  betterments  directly  to 
Operating  Expenses.  Such  charges  increase  the  in- 
vestment but  leave  no  permanent  record  of  the 
property  value  thereby  created.  Consequently, 
the  increase  is  not  shown  in  the  General  Balance 


THE  GENERAL  BALANCE  SHEET         247 

Sheet.  On  the  other  hand,  many  financially  weak 
roads  neglect  to  charge  losses  in  actual  value  of 
property,  whether  through  operations,  through  re- 
construction or  through  obsolescence,  against  earn- 
ings. The  actual  investment  is  thus  correspondingly 
reduced  without  a  bookkeeping  record  thereof. 

With  reference  to  some  of  the  standard  railroads 
such  as  the  Pennsylvania  and  the  Illinois  Central, 
it  is  sometimes  possible  by  an  analysis  of  the  annual 
reports  over  a  series  of  years  to  determine,  approxi- 
mately, to  what  extent  permanent  improvements 
were  made  from  current  earnings.  No  such  ap- 
proximation can  be  made,  however,  in  the  case  of 
railroad  companies  failing  to  enter  losses  due  to 
abandonment  of  property  and  to  obsolesence.  A 
railroad,  let  us  say,  constructed  a  line  over  a  moun- 
tain because  it  was  more  economical  at  the  outset 
to  haul  the  traffic  over  steep  grades  than  to  undergo 
the  heavy  cost  of  cutting  a  tunnel.  In  the  course 
of  time,  because  of  the  growth  of  traffic,  the  business 
can  no  longer  be  handled  over  the  mountain  line, 
and  a  tunnel  is  constructed.  The  entire  cost  of 
this  tunnel  is  added  to  the  account.  Cost  of  Road  & 
Equipment,  without  any  deduction  or  allowance  for 
the  cost  of  the  original  mountain  section  which  is 
abandoned.  According  to  correct  accounting  theory 
the  cost  of  the  displaced  line — (assuming  that  it 
was  known  several  years  in  advance  that  it  would 
be  displaced) — should  have  been  gradually  effaced 
from  the  company's  books  by  deductions  from 
Net  Income  or  from  Profit  <&:  Loss,    In  the  absence  of 


248      AMERICAN  RAILROAD  ECONOMICS 

official  regulation  prior  to  1908,  no  railroad  was 
required  to  follow  this  practice,  though  they  are 
now  governed  by  strict  regulations  in  these  mat- 
ters. 

Aside  from  errors  in  accounting  principles,  the 
property  accounts  frequently  fail  to  correctly  rep- 
resent actual  investment  because  of  ''stock  water- 
ing." This  phrase  is  too  familiar  to  require  detailed 
explanation.  Railroad  reorganizations;  the  purchase 
by  one  company  of  the  property  of  another  through 
exchange  of  securities;  the  issue  of  stock  bonuses 
and  the  like,  all  have  affected  the  book  valuation  of 
railroad  property  without  changing  correspondingly 
the  "actual"  money  cost  of  the  investment.  The 
resulting  difficulties  in  measuring  investment  or 
value  led  Congress  early  in  1913  to  pass  a  law  au- 
thorizing governmental  valuation  of  railroad  physi- 
cal property.  Whether  this  will  accomplish  the 
desired  effect  is  a  matter  of  much  controversy  and 
does  not  call  for  comment  in  this  work. 

The  important  problem  in  the  study  of  property 
investment  is  the  measurement  of  the  ''Cost  of  Road 
and  Equipment  ^  by  some  satisfactory  standard  unit. 
Cost  per  mile  of  single  track  owned  is  frequently  em- 
ployed as  the  most  acceptable  unit.  Great  caution, 
however,  must  be  exercised  in  using  this  standard. 
Differences  not  only  in  the  physical  qualities  of  the 
railroad  property  itself  but  also  in  the  cost  of  con- 
struction (due  to  topographical  and  geological  con- 
ditions) may  render  comparisons  on  the  per  mile 
basis  absolutely  worthless  and  even  misleading.    No 


THE  GENERAL  BALANCE  SHEET         249 

two  miles  of  railroad  cost  exactly  the  same.  Some 
cost  less  than  $18,000,  others  cost  $500,000  or  more. 
Moreover,  miles  of  yard  tracks  in  some  large  ter- 
minals where  right  of  way  is  expensive  cost  more 
than  the  average  cost  of  the  main  track. 

A  fm*ther  objection  to  the  'per  mile  valuation  is 
that  "Cost  of  Road  &  Equipment"  as  between 
different  railroad  companies  (or  in  the  same  com- 
pany at  different  periods  of  time)  does  not  constitute 
the  same  items  or  identical  items  similarly  appor- 
tioned. Some  of  the  strong  railroad  companies  own 
their  own  terminals  and  dock  facilities  instead  of 
incorporating  them  separately  or  sharing  the  owner- 
ship with  other  roads.  The  inclusion  of  these  ter- 
minals under  ^^ Property  Investment^',  because  of  their 
extremely  high  cost  relative  to  other  property,  makes 
a  railroad  appear  to  have  a  much  larger  per  mile 
investment  in  physical  property  than  if  these  facili- 
ties were  leased  or  operated  separately.  The  ab- 
sence of  itemization  and  of  detailed  classification 
of  railroad  property  in  the  General  Balance  Sheet 
is  thus  a  deterrent  to  correct  analysis  of  relative 
property  cost. 

Another  difficulty  of  the  same  nature  arises  from 
the  intercorporate  relations  of  railroad  companies 
whereby  a  large  part  of  railroad  mileage  is  not  owned 
and  operated  in  fee  simple,  but  through  leasehold 
and  stock  ownership.  The  value  of  the  equity  in 
the  controlled  properties  is  not  always  accurately 
represented  under  ''Securities  of  Proprietary,  Affili- 
ated or  Controlled  Companies."    Yet  in  many  cases 


250      AMERICAN  RAILROAD  ECONOMICS 

the  parent  company  combines  the  mileage  of  sub- 
sidiaries with  its  own  mileage,  and  when  a  General 
Balance  Sheet  represents  a  "system  report"  the 
property  accounts  of  subsidiaries  are  rightly  in- 
corporated with  the  parent  company's  own  prop- 
erty held  in  fee  simple. 

Examples  of  statistical  complexities  due  to  rail- 
road intercorporate  relations  are  to  be  found  in  the 
oflScial  statements  submitted  to  the  Interstate  Com- 
merce Commission  during  the  freight  rate  contro- 
versy of  1910.  Thus,  the  ''Cost  of  Road  &  Equip- 
ment" as  submitted  by  the  Baltimore  &  Ohio  Rail- 
road for  the  years  1908  to  1910,  inclusive,  were: 


Miles  Owned— All  Tracks  i 

1908 
7,358.43 

1909 
7,3U-16 

1910 
8,215.19 

Cost  of  Road  and  Equipment.  . 
— per  mile  of  line  owned  .... 
— per  mile  owned — all  tracks 

$396,018,427 
100,337 

52,818 

$405,984,542 

102,447 

55,280 

$281,153,035 
64,881 
34,224 

It  will  be  noticed  that  although  the  miles  owned  in 
1910  were  871  miles  greater  than  1909,  the  cost  of 
road  declined  from  $405,984,542  to  $281,153,035, 
representing  a  decrease  per  mile  of  track  owned  from 
$55,280  to  $34,224.  The  annual  report  of  the  com- 
pany for  1910  offered  no  explanation  of  this  startling 
discrepancy.  Inquiry  revealed  the  cause  as  a  change 
in  the  "system  report"  of  the  company.  Previous  to 
1910  the  property  accounts  of  the  Baltimore  & 
Ohio's  proprietary  companies  (companies  owned  en- 

1  Includes  mileage  of  proprietary  companies. 


THE  GENERAL  BALANCE  SHEET         251 

tirely  but  operated  under  separate  corporate  or- 
ganizations) were  incorporated  in  the  parent  com- 
pany's item  ^^Cost  of  Road  &  Equipment  In  1910, 
however,  they  were  excluded  from  this  item  and 
placed  under  ^'Securities  Owned.""  Thus,  to  arrive  at 
actual  cost  of  the  Baltimore  &  Ohio  property,  on 
which  to  base  operating  revenues  of  1910,  about 
$185,000,000  book  value  of  ''Securities  Owned'' 
should  be  added  to  the  $281,000,000  representing 
the  reported  book  value  of  "  Cost  of  Road  &  Equip- 
ment.''  This  makes  the  actual  cost  of  road  $466,- 
236,743  on  June  30,  1910,  which  compares  properly 
with  the  figures  in  the  1909  statement.^ 

Securities  Owned:  The  intricate  corporate  inter- 
relationships of  American  railroad  companies  de- 
mand a  careful  analysis  of  the  items  included  under 
"Securities  Owned.''  As  has  been  already  pointed 
out,  the  Interstate  Commerce  Commission  distin- 
guishes three  classes  of  securities  owned;  (1)  those 
of  subsidiary  companies — pledged;  (2)  those  issued 
directly  or  assumed  by  the  company  and  also  pledged; 
and  (3)  the  securities  of  subsidiary  companies  held 
unpledged. 

(1)  Under  the  first  is  included  the  book  value  of 
pledged  securities  of  proprietary,  affiliated  and  con- 
trolled companies  "whose  property  is  u^ed  by  or  forms 

^  A  similar  apparent  discrepancy  was  produced  when  the  Union  Pacific 
in  1901  merged  the  accounts  of  the  Oregon  Short  Line  and  the  Oregon 
Railroad  and  Navigation  Company  with  its  own.  In  this  case  an 
increase  of  approximately  $83,000,000  in  the  "Cost  of  Road  and 
Equipment"  item  was  caused  in  order  to  properly  readjust  the  ac- 
counts. 


252      AMERICAN  RAILROAD  ECONOMICS 

a  "part  of  the  railroad  system  of  the  respondent  com- 
pany,*^  These  securities  have  been  pledged  as  col- 
lateral for  some  part  of  the  parent  company's  funded 
debt  or  other  obligations.  They  may  include  stocks 
and  bonds  of  controlled  railroad  lines,  of  terminal, 
bridge  and  ferry  companies  or  of  other  concerns 
forming  a  link  in  a  general  transportation  system. 
Since  these  securities  are  pledged  under  a  deed  of 
trust  they  are  not  readily  convertible  into  cash  or 
other  assets,  and  cannot  be  used  for  purposes  of 
obtaining  further  credit. 

(2)  Under  the  second  class  are  included  the  par 
or  face  value  of  the  respondent  company's  own 
funded  obligations  or  the  obligations  it  has  legally 
assumed  as  a  direct  liability,^  which  are  pledged  as 
collateral  for  other  indebtedness.  Under  the  ruling 
of  the  Interstate  Commerce  Commission,  both  the 
par  value  of  these  pledged  "treasury"  securities 
and  the  new  obligations  for  which  they  are  pledged 
as  security  appear  as  liabilities  in  the  General  Balance 
Sheet,  There  is  thus  an  artificial  inflation  of  both 
assets  and  liabilities. 

(3)  As  to  the  third  class.  Securities  of  Controlled 
Companies — Unpledged,  though  these  are  technically 
**free  assets"  since  no  deed  of  trust  restricts  their 
sale,  for  all  practical  purposes  they  are  as  "fixed" 
as  the  railroad's  own  physical  property.  Accordingly 
these  securities  are  not  deemed  "marketable." 
They  may  be  used,  however,  for  purposes  of  obtain- 

^  Under  this  class  are  not  included  securities  which  have  been  endorsed 
or  the  payment  of  which  has  been  guaranteed. 


THE  GENERAL  BALANCE  SHEET         253 

ing  additional  credit  and  therefore  may  form  the 
basis  of  new  capital  obligations. 

Ordinarily  a  corporation  is  said  to  be  administered 
and  controlled  by  another  company  when  the  lat- 
ter owns  51  per  cent,  of  the  class  or  classes  of  capi- 
tal stock  in  which  the  voting  power  and  the  cor- 
porate management  is  lodged.  This  constitutes 
corporate  control.  However,  among  railroad  com- 
panies, particularly  when  control  is  held  jointly 
with  other  companies,  this  majority  proportion  of 
stock  ownership  is  not  required.  For,  although  the 
relative  equity  in  a  subsidiary  may  represent  only 
a  minority  of  the  capital  stock  having  voting  power, 
if  this  minority  forms  a  part  of  a  "joint  control" 
with  other  lines  or  is  held  for  the  purpose  of  obtaining 
use  of  additional  facilities  or  for  promoting  exchange 
of  traffic,  the  equity  is  to  all  intents  and  purposes  a 
"fixed"  asset. 

There  is  probably  no  better  example  of  "joint 
control"  for  the  purpose  of  obtaining  additional 
facilities  than  that  of  the  Terminal  Railway  Associa- 
tion of  St.  Louis,  declared  a  violation  of  the  Sherman 
Anti-Trust  Law  by  the  United  States  Supreme  Court 
in  April,  1912.  Nine  railroads  owned  each  a  pro- 
portionate share  of  the  capital  stock  of  this  terminal 
company.  One  of  the  regulations  of  the  terminal 
company  was  a  requirement  that  no  privileges  should 
be  granted  to  any  new  railroad  as  long  as  any  one 
of  the  nine  controlling  roads  should  object.  This 
constituted  a  practical  monopoly  of  the  facilities, 
inasmuch  as  it  is  out  of  the  question  for  any  new 


254      AMERICAN  RAILROAD  ECONOMICS 

terminal  to  be  constructed  or  access  gained  to  St. 
Louis,  owing  to  the  peculiar  topography  of  the  place. 
In  this  instance,  it  is  readily  seen  that,  although 
one-ninth  ownership  did  not  constitute  administra- 
tive control  by  any  individual  company,  nevertheless, 
it  gave  each  company  a  valuable  right  to  use  a  ter- 
minal facility.  Consequently,  the  stock  of  the  St. 
Louis  Terminal  Railway  Association  represents,  in 
each  case,  a  part  of  the  property  investment  of  the 
holding  companies. 

Miscellaneous  Investments:  With  some  classes  of 
American  railroads,  business  operations  other  than 
transportation  have  been  a  leading  factor  in  their 
financial  progress.  The  ownership  of  large  coal 
mines,  of  steel  mills  and  of  oil  and  ore  lands  are  but 
a  few  of  the  large  railroad  undertakings.  The  Phila- 
delphia &  Reading  Railroad  was  forced  to  submit  to 
at  least  three  reorganizations  in  order  to  scale  down 
the  heavy  funded  obligations  caused  by  excessive 
investments  in  unproductive  coal  lands.  On  the 
other  hand,  the  Northern  Pacific,  because  of  a  divi- 
dend received  from  the  Northwestern  Improvement 
Company — one  of  its  "mysterious"  subsidiary  con- 
cerns— was  enabled  in  1908  to  pay  an  extra  cash 
distribution  of  more  than  11  per  cent,  to  its  share- 
holders. Similarly,  the  Great  Northern  Railroad,  in 
order  to  divest  itself  of  the  swollen  value  in  its  ore 
properties,  in  November,  1906,  created  the  Great 
Northern  Ore  Trust,  distributing  to  each  stock- 
holder a  proportionate  share  of  participation  cer- 
tificates.     Other    instances    of    bankruptcy    or    of 


THE  GENERAL  BALANCE  SHEET        ^55 

bonuses  from  the  ownership  of  "outside"  enter- 
prises might  be  given.  A  diflScult  problem  is  the 
ascertainment  of  the  real  worth  and  profitableness 
of  these  undertakings.  Notwithstanding  publicity 
of  railroad  affairs,  this  information  is  not  generally 
obtainable  from  the  annual  reports  of  the  companies 
or  from  the  official  data  of  the  Interstate  Commerce 
Commission.  Certainly  the  values  at  which  these 
investments  are  carried  in  the  General  Balance  Shed 
do  not  necessarily  correspond  in  any  way  with  their 
actual  worth.  The  profit  with  which  the  railroad 
company  credits  itself  as  coming  from  these  sources 
does  not  necessarily  coincide  with  the  actual  earn- 
ings of  the  properties.  There  is  no  law  which  pro- 
vides for  the  publicity  of  the  accounts  of  the  non- 
transportation  corporations  controlled  by  railroad 
companies.  It  is  discretionary  with  the  railroad's 
directors  whether  the  facts  and  conditions  in  each 
case  shall  be  made  known.  The  occasional  suspicion 
of  "hidden  assets,"  nurses  from  time  to  time  a  specu- 
lative interest  in  certain  railroad  shares.  Thus,  it 
seems  very  plausible  that  in  view  of  the  Northern 
Pacific's  "melon"  to  stockholders  in  November, 
1908,  from  the  Northwestern  Improvement  Com- 
pany, another  of  the  same  kind  is  likely  to  come. 
The  Balance  Sheet  of  the  Northern  Pacific,  however, 
reveals  the  book  value  (which  is  evidently  the  orig- 
inal cost)  of  the  Northwestern  Improvement  Com- 
pany's stock  as  $7,000,000  (the  par  value).  But  a 
concern  which  can  pay  a  cash  dividend  of  $17,453,000 
is  presumably  of  greater  worth.    The  General  Balance 


^56      AMERICAN  RAILROAD  ECONOMICS 

Sheet  does  not  necessarily  reflect  the  real  worth. 
It  contains  merely  the  book  values  of  the  assets. 

The  Canadian  Pacific  Railway  is  another  instance 
where  great  importance  is  attached  to  "hidden" 
assets  in  outside  properties.  It  is  contended  that 
the  company's  vast  holdings  in  farm  and  townsite 
lands,  when  analyzed,  show  an  amazing  accumula- 
tion of  wealth  from  which  the  shareholders  will 
profit  in  the  future.  In  appraising  the  value  of 
Canadian  Pacific's  "hidden  assets"  the  fact  is 
pointed  out  that  the  company  is  the  largest  indi- 
vidual landowner  on  the  face  of  the  globe.  More- 
over, there  is  probably  no  landowner  in  the  world 
whose  property  is  mounting  so  rapidly  in  value  as 
is  the  property  of  the  Canadian  Pacific  Railway. 

There  is  generally  no  way  of  telling  whether  the 
profits  received  from  miscellaneous  investments  as 
shown  in  the  Income  Account  or  Profit  &  Loss  state- 
ments of  the  railroads  represent  in  each  case,  even 
approximately,  the  amounts  actually  earned.  A 
general  feeling  is  prevalent  in  some  quarters  that 
the  directors  of  the  Reading  Company  have  been 
persistently  understating  the  earnings  of  its  coal 
properties.  Yet,  even  after  several  reorganizations, 
the  accounts  of  the  Reading  Coal  and  Iron  Company 
have  shown  a  very  small  return  on  the  investment. 
The  existence  of  such  uncertainties  in  large  organiza- 
tions whose  affairs  are  so  closely  observed  makes  it 
evident  that  the  public  judgment  should  be  based  only 
on  certified  and  readily  confirmed  facts  or  conditions 
and  not  on  suppositions  and  speculative  rumors. 


THE  GENERAL  BALANCE  SHEET         257 

The  movement  toward  the  acquisition  and  opera- 
tion of  non-transportation  enterprises  by  railroad 
companies  has  been  somewhat  curtailed  by  the  so- 
called  Commodities  Clause  of  the  Interstate  Com- 
merce Act,  enacted  June  29th,  1906.  This  clause 
prohibits  a  railroad  company  from  transporting  over 
its  own  hues  commodities  produced  by  it  either 
directly  or  through  control  of  separately  organized 
corporations,  unless  such  commodities  are  for  its 
own  use.  As  a  result  of  this  prohibition,  the  Dela- 
ware, Lackawanna  &  Western  and  the  Lehigh  Valley 
Railroad  each  organized  "coal  sales  companies"  to 
purchase  the  product  of  their  respective  coal  mines. 
Litigation  is  still  pending  in  the  case  of  some  other 
coal  roads. 

Another  element  besides  the  direct  profits  re- 
ceived from  outside  enterprises  enters  into  the  es- 
timation of  their  value.  Most  of  the  acquisitions  of 
this  nature  have  been  made  largely  or  entirely  with 
the  view  of  creating  or  maintaining  railroad  traffic. 
Thus,  Mr.  F.  B.  Gowen,  who  as  President  of  the 
Philadelphia  &  Reading  Railroad  during  the  period 
1869-1875  acquired  the  company's  vast  coal  lands, 
stated  that  his  purpose  was  first  to  forestall  the 
building  of  rival  coal  roads  and,  secondly,  to  use 
the  coal  traffic  as  a  means  of  providing  a  west  bound 
tonnage  by  the  aid  of  which  the  Reading  could  de- 
velop into  a  "trunk  line"  and  compete  with  the 
Erie  and  the  New  York  Central  for  ''through" 
business.  Accordingly,  the  aim  was  not  to  obtain 
profit  directly  from  coal  mine  operations.    Similarly, 


^58      AMERICAN  RAILROAD  ECONOMICS 

the  Pennsylvania  Railroad's  ownership  of  the  Cam- 
bria Steel  Company  is  apparently  not  with  a  view 
to  operating  the  plant  for  a  profit,  but  rather  as  a 
curb  to  the  price  exactions  of  steel  companies  for 
materials.  The  intrinsic  value  of  these  investments 
are  not  to  be  gauged  exclusively  by  the  amount  of 
their  cash  dividends. 

Working  Assets  and  Liabilities.  The  relative 
amount  and  kind  of  the  free  "working"  or  "liquid" 
assets  {i.  e.,  cash  or  cash  substitutes)  of  a  railroad 
company  require  in  many  cases  closer  observation 
and  analysis  than  the  property  accounts.  It  is  with 
these  assets  that  the  railroad  meets  current  business 
needs  and  pays  current  expenses  and  obligations. 
If  they  do  not  suffice  for  this  purpose  the  company 
must  either  borrow  additional  funds  or  acknowledge 
insolvency.  A  receivership  might  result,  therefore, 
even  when  the  value  of  the  "fixed"  assets  are  in 
excess  of  its  actual  liabilities,  or  when  the  net  earn- 
ings are  sufficient  to  cover  interest  on  funded  obliga- 
tions. Liquid  assets  are  a  part  of  the  necessary 
working  machinery  of  a  railroad  company.  When 
the  amount  on  hand  is  depleted,  it  must  be  replen- 
ished by  borrowing  or  by  reduction  of  wages  or  of 
dividends.  Wage  cutting  may  lead  to  costly  labor 
difficulties.  Dividend  cutting  may  impair  the  com- 
pany's credit,  rendering  impossible  the  securing  of  new 
capital  required  for  improvements  and  extensions. 
As  a  rule,  railroad  transactions  are  conducted  on 
a  "cash  basis,"  (passengers  and  shippers  generally 
paying  in  advance  or  immediately  after  the  services 


THE  GENERAL  BALANCE  SHEET         259 

are  rendered).  Need  for  working  capital  arises 
mainly  from  the  expenditures  for  upkeep,  improve- 
ments and  extensions  and  not  generally  from  trans- 
portation operations. 

Among  the  Working  Assets  are  included  the  in- 
ventories, (i.  e.y  materials  and  supplies)  and  the 
marketable  treasury  securities.  The  items  requiring 
first  consideration,  however,  are  the  Cash  and  the 
Accounts  Receivable,  The  size  of  the  cash  balance 
together  with  other  items  readily  convertible  into 
cash,  when  taken  in  relation  to  current  requirements 
and  to  the  amount  of  construction  work  on  hand, 
may  indicate  roughly  whether  or  not  additional 
financing  through  sale  of  securities  is  forthcoming. 
The  borrowing  of  additional  funds  has  a  direct  in- 
fluence (in  some  instances  favorable,  in  others  un- 
favorable) on  the  market  value  of  securities  already 
outstanding.  The  cash  position  of  a  railroad  system, 
therefore,  is  closely  observed  by  railroad  financiers. 

A  common  method  of  determining  the  relative 
adequacy  of  the  "working  assets''  is  by  contrasting 
these  items  with  the  corresponding  "working  liabili- 
ties'' on  the  opposite  side  of  the  General  Balance 
Sheet.    This  may  be  done  in  the  following  manner; 

Working  Assets: 

Cash  Balances $8,000,000 

Accounts  and  Balances  Receivable 13,000,000 

Materials  and  Supplies 6,500.000 

Total  Working  Assets $27,500,000 

(Deduct)   Working  Liabilities:  10,500,000 

Net  Working  Assets $17,000,000 


260      AMERICAN  RAILROAD  ECONOMICS 

The  result  shown  by  the  above  computation  has 
no  significance  unless  compared  with  that  of  the 
years  immediately  preceding  or  contrasted  with  the 
cash  position  of  other  railroad  companies.  All 
changes  and  disparities  in  gross  earnings,  operating 
conditions  and  immediate  capital  requirements  are 
to  be  taken  into  consideration.  Tests  of  this  char- 
acter, though  not  final,  frequently  furnish  a  clue  to 
future  financial  developments. 

Surplus.  We  come  now  to  a  consideration  of  the 
Surplus  items  in  the  General  Balance  Sheet,  These, 
in  the  aggregate,  form  a  foundation  for  credit.  In 
other  words,  they  constitute  a  sort  of  guarantee  fund 
against  disaster.  At  the  same  time,  they  are  a  re- 
serve out  of  which  improvements  and  extensions  may 
be  made. 

Attention  has  already  been  directed  to  the  Amer- 
ican railroad  policy  of  improving  the  physical  prop- 
erty by  appropriations  from  current  income.  This 
has  been  accomplished  in  two  ways.  In  the  first 
place,  many  improvements  and  betterments  have 
been  charged  to  Operating  Expenses  as  a  part  of 
maintenance.  Secondly,  surplus  earnings,  instead 
of  being  distributed  in  toto  to  shareholders,  have 
been  partly  applied  to  improvements  and  extensions 
or  to  the  general  resources  of  the  corporation.  In 
the  decade  ended  June  30,  1910,  the  railroads,  not- 
withstanding heavier  maintenance  outlays  and  in- 
creased fixed  charges,  accumulated  an  aggregate 
surplus  of  $606,536,556.  This,  according  to  the 
Interstate    Commerce    Commission's    computation. 


THE  GENERAL  BALANCE  SHEET         261 

represents  an  increase  of  312  per  cent,  of  the  surplus 
of  1899,  whereas,  the  mileage  had  increased  only 
36  per  cent.^ 

This  accumulated  Surplus  of  the  American  rail- 
roads does  not  constitute  cash  or  its  equivalent. 
It  cannot  be  physically  distributed  as  a  bonus.  Most 
of  it  is  expended  for  additional  property  and  facili- 
ties. Accordingly,  even  with  a  large  Surplus  in  the 
General  Balance  Sheet,  a  company  may  be  financially 
embarrassed  because  of  insufficient  cash  assets  to 
meet  current  obligations.  The  recourse  under  these 
circumstances  is  to  borrow  cash  on  the  basis  of  the 
accumulated  Surplus. 

The  Surplus  accounts  of  the  railroads,  do  not 
represent  in  all  cases  merely  the  aggregate  net  earn- 
ings which  the  directors  have  chosen  not  to  distrib- 
ute among  shareholders.  As  pointed  out  on  page  244, 
the  term  "Surplus,"  as  used  in  accounting,  means 
simply  the  excess  of  the  book  value  of  the  assets 
over  the  liabilities.  It  is  the  item  which  makes  an 
equation  of  the  two  sides  of  the  General  Balance  Sheet, 
Hence,  the  Surplus,  of  which  the  Profit  &  Loss  Ac- 
count  forms  the  **free"  or  unappropriated  part,  is 
the  result  of  adjustments  made  from  year  to  year 
on  both  the  debit  and  credit  sides.  Some  of  these 
adjustments  have  no  reference  whatever  to  current 
income.  Thus,  profits  from  the  sale  of  assets  and 
from  other  extraneous  sources  are  regularly  credited 
to  Profit  &  Loss.    The  item  may  also  include  premi- 

^See  Report  of  the  Commission,  "In  re  Advances  in  Rates,"  etc. 
No.  3500.  p.  5378. 


262      AMERICAN  RAILROAD  ECONOMICS 

urns  realized  from  the  sale  of  new  stock  or  bonds. 
We  had  an  illustration  of  this  in  1909  when  the 
"St.  Paul"  directors  credited  to  the  Surplus,  through 
the  Profit  &  Loss  Account,  $1,532,336  received  as 
premiums  on  stock  sold  back  in  1901  and  1902. 
Similarly,  in  1903  the  Pennsylvania  Railroad  sold 
$75,094,750  stock  at  120.  The  premium  received 
represented  over  $15,000,000.  The  New  York  Cen- 
tral, also,  in  1902,  disposed  of  stock  amounting  to 
$17,250,000  which  was  put  out  at  125.  In  the  same 
way,  the  New  York,  New  Haven  &  Hartford  dis- 
posed of  $44,643,800  of  stock  at  125  and  back  in 
1903-04  put  out  new  shares  as  high  as  175.^ 

Furthermore,  several  leading  companies  have 
created  some  large  issues  of  "convertible"  bonds. 
The  holders  frequently  exchange  these  bonds  for 
stock  on  such  terms  that  the  par  value  of  the  stock 
given  in  exchange  makes  a  very  much  smaller  total 
than  the  par  value  of  the  bonds  taken  up.  The  book- 
keeping effect  of  such  an  operation  is  to  diminish 
the  amount  of  the  liabilities  as  represented  by  the 
original  par  value  of  the  bonds,  and  to  swell  the  sum 
total  of  the  Profit  &  Loss  balance  to  the  extent  of 
the  difference.  The  Pennsylvania  created  $50,000,000 
of  convertible  3j^s  in  1902  and  made  another  issue 
of  the  same  kind  for  $100,000,000  in  1905.  The 
first  issue  is  convertible  into  stock  on  the  basis  of 
140  for  the  shares  and  the  second  on  the  basis  of  150; 
$52,942,500  of  the  bonds  had  been  converted  up  to 
January  1,  1911,  and  were  represented  on  the  books 

*  "The  Commercial  and  Financial  Chronicle,"  vol.  92.  p.  920. 


THE  GENERAL  BALANCE  SHEET         263 

by  only  $37,189,167  of  stock.  Thus,  there  was  a 
"paper"  profit  of,  approximately,  $15,000,000, 
which  had  no  connection  whatever  with  surplus 
earnings.  To  assume,  therefore,  that  growth  of 
the  Surplus  account  represents  nothing  but  accu- 
mulated earnings  from  operation  is  technically  in- 
correct. 

On  the  other  hand,  the  amount  of  the  Surplus 
is  no  accurate  indication  of  the  actual  additions  in 
value  to  the  railroad  property  beyond  the  invest- 
ment represented  by  the  par  of  the  outstanding 
capital  securities.  Among  some  companies,  the 
practice  has  prevailed  of  reducing  Surplus  from 
time  to  time  for  the  purpose  of  "writing  off"  as- 
sets not  essentially  productive  of  income,  or  to 
offset  possible  obsolescence.  Thus,  the  Pennsyl- 
vania Railroad  deducted  more  than  one-half  the 
cost  of  its  New  York  terminal  from  accumulated 
Surplus,  The  Pennsylvania  Company  also  in  1909 
reduced  Surplus  by  $10,000,000  on  account  of  New 
York  terminal  construction  though  the  property  is 
not  a  part  of  its  corporate  assets. 

Reference  has  already  been  made  to  the  theory 
of  railroad  directors  and  financiers  that  a  large 
Surplus  must  be  accumulated  and  shown  in  the 
Balance  Sheet  in  order  to  enhance  railroad  borrowing 
power.  In  other  words,  each  addition  to  Surplus 
means  greater  underlying  strength  to  the  securities. 
This  is  only  true,  however,  when  additions  represent 
actual  increased  value  of  assets.  The  theory  as- 
sumes  that   all    expenses   properly    chargeable   to 


264      AMERICAN  RAILROAD  ECONOMICS 

operating  revenues  have  been  fully  met  and  that 
reserves  or  appropriations  for  obsolescence,  actual 
or  probable  displacement,  and  impairment  in  earn- 
ing power  of  assets  have  been  fully  deducted.  Other- 
wise, the  Surplus  is  a  "paper  surplus." 

A  large  surplus  fosters  stock  speculation  because 
of  "melon-cutting."  By  this  is  meant  a  pro  rata 
distribution  to  shareholders,  usually  in  additional 
stock  representing  the  whole  or  part  of  the  accumu- 
lated Surplus.  Thus,  the  Lehigh  Valley  Railroad, 
having  built  its  property  up  largely  through  earn- 
ings and  through  very  conservative  financing,  and 
having  put  the  physical  plant  in  excellent  shape, 
was  ready  in  1912  to  make  an  adjustment  with  its 
stockholders  covering  accumulated  profits.  The 
adjustment  took  the  form  of  an  extra  dividend  of 
10  per  cent,  to  be  applied  to  the  purchase  of  new 
shares  of  the  company.  While  there  was  not  the 
slightest  concealment  of  Lehigh's  gradual  accumula- 
tion of  profit  and  of  the  fact  that  at  some  time  in 
the  not  distant  future  stockholders  would  receive 
stored  up  earnings  which  had  previously  been  put 
back  into  the  property,  the  fact  that  the  "melon" 
was  possible  tended  to  give  the  Lehigh  Valley  shares 
a  speculative  character. 


CHAPTER  XII 

RAILROAD   CAPITALIZATION 

Nature  of  Railroad  Capitalization.  In  analyzing 
railroad  capitalization  a  distinction  must  be  made 
at  the  outset  between  Capital  and  Capitalization, 
Capital  is  the  amount  of  actual  money  or  equivalent 
value  invested  in  the  property.  It  comes  both  from 
the  issue  of  securities  an^ffom  surplus  earnings. 
Capitalization,  however,  represents  the  nominal 
amount  of  securities  outstanding,  including  funded 
indebtedness.  Surplus  earnings  turned  back  into 
1Ee"property  thus  become  a  part  of  capital,  but  are 
not  correspondingly  represented  in  capitalization. 
Because  of  this  distinction  it  is  clearly  evident  that 
capitalization  even  when  paid  in  entirely  at  face 
value  does  not  represent  the  actual  value  of  the  prop- 
erty. It  does  not  indicate  what  it  is  worth,  the 
present  or  potential  earning  power,  or  the  amount 
of  the  annual  charges  against  income. 

Among  most  American  railroads,  capitalization, 
{i.  e.,  the  aggregate  face  value  of  stocks,  bonds  and 
other  securities  as  stated  in  the  General  Balance 
Sheet),  is  as  much  due  to  arbitrary  adjustments, 
necessitated  by  reorganizations,  mergers  and  credit 
conditions,  as  to  the  receipt  of  cash  paid  in  by  the 
public.    The  regulation  and  control  of  railroad  capi- 

265 


266       AMERICAN  RAILROAD  ECONOMICS 

talization  by  governmental  authorities  is  of  relatively 
recent  development  in  the  United  States.  Until 
within  the  last  two  decades,  railroad  companies, 
with  but  few  exceptions,  were  permitted  to  issue 
shares  and  securities  whenever  and  in  whatever 
manner  they  desired.  The  evils  resulting  from  this 
liberal  policy  have  been  sufficiently  magnified.^ 
Unlike  many  industrial  concerns,  railroads,  as  a 
rule,  have  no  sinking  fund  or  other  provisions  for 
the  amortization  and  extinguishment  of  capital  lia- 
bilities. With  but  few  exceptions,  railroad  stocks 
and  bonds  are  issued  as  permanent  and  perpetual 
obligations.  Bonds  may  mature  on  a  fixed  date, 
but,  with  few  and  unimportant  exceptions,  their 
refunding  is  necessary.  Accordingly  when  injudicious 
financing  or  mismanagement  require  capitalization 
readjustment,  it  is  accomplished  only  through  re- 
ceivership or  reorganization. 

The  Pere  Marquette  Railroad  furnishes  an  in- 
stance of  the  absence  of  proper  capital  amortization 
provisions.  This  railroad  system  was  built  orig- 
inally through  a  timber  region  to  afford  transporta- 
tion facilities  to  lumber  camps  and  saw  mills.  The 
mileage,  therefore,  was  extended  wherever  timber 
operations  were  large  enough  to  furnish  traffic. 
Bonds  were  sold  with  which  to  build  these  lines. 
After  a  time,  however,  the  gradual  exhaustion  of 
timber  supplies  caused  the  lumber  industry  to  move 
to  other  regions.  The  Pere  Marquette  was  thus 
deprived  of  its  principal  business.     Unable  to  de- 

^  See  "Report  of  the  Railroad  Securities  Commission,"  1911. 


RAILROAD  CAPITALIZATION  267 

velop  new  traffic,  and  compelled*  to  pay  interest 
charges  on  "dead"  capital,  the  credit  of  the  com- 
pany became  impaired.  The  failure  to  extinguish 
the  portion  of  Pere  Marquette's  capitalization  repre- 
senting unproductive  property  prevented  the  com- 
pany from  acquiring  new  funds  with  which  to  im- 
prove its  main  lines.  Handicapped  by  inadequate 
physical  facilities,  it  cannot  compete  for  through 
traffic  with  better  equipped  rivals.  Moreover,  it 
must  continue  to  operate  branch  lines  which,  though 
originally  profitable,  have  ceased  to  pay  interest  or 
even  working  expenses. 

There  are  many  other  instances  of  incautious 
financing.  The  Toledo,  St.  Louis  &  Western  Rail- 
road, for  example,  issued  bonds  bearing  a  fixed  in- 
terest charge  in  order  to  acquire  a  majority  of  the 
Chicago  &  Alton  Railroad's  capital  stock.  In  1907, 
at  the  time  these  securities  were  exchanged,  the 
dividends  on  the  Chicago  &  Alton's  shares  covered 
the  interest  charges  on  the  Toledo  St.  Louis  &  West- 
ern bonds  issued  for  their  acquisition.  The  earnings 
on  the  Chicago  &  Alton's  lines  have  since  declined, 
however,  resulting  in  discontinuance  of  dividends. 
Consequently,  Toledo,  St.  Louis  &  Western,  as  a 
stockholder,  has  been  deprived  of  income  with  which 
to  pay  interest  charges  on  the  collateral  bonds.  Its 
own  margin  of  earnings  above  fixed  charges  were 
barely  sufficient  to  withstand  this  loss  and  all  its 
securities  have  depreciated  in  value. 

The  cases  above  cited  are  merely  illustrative  of 
the  caution  required  in  sanctioning  issues  of  railroad 


268       AMERICAN  RAILROAD  ECONOMICS 

securities.  Wise  financial  operations  demand  shrewd 
judgment  and  close  scrutiny.  It  is  for  this  reason 
that  an  accurate  statement  of  the  facts  underlying 
security  issues  is  a  matter  of  public  concern.  Pub- 
licity is  a  requisite  of  modern  investment  finance. 
The  capital  outlay  of  railroads  is  enormous  in  pro- 
'  portion  to  the  business  done.  This  capital  is  spent 
once  for  all  on  the  supposition  that  a  certain  mini- 
mum traffic  will  be  moved  at  prescribed  rates.  These 
rates  cannot  be  changed  arbitrarily.  As  pointed  out 
in  Chapter  III,  though  large  traffic  is  necessary  to 
make  possible  low  rates,  low  rates  are  necessary  to 
secure  large  traffic.  A  railroad,  therefore,  cannot 
readily  recover  loss  in  revenues  by  increasing  charges. 
If  an  ordinary  manufacturing  or  commercial  business 
gets  into  financial  difficulties  because  of  unwieldy 
capitalization  it  may  cease  operations  and  be  liqui- 
dated. Not  so  with  a  railroad.  When  a  railroad 
company  has  exhausted  its  credit;  is  unable  to  raise 
money  for  new  extensions,  and  cannot  afford  to  im- 
prove f acihties  or  reduce  rates,  it  is  a  lasting  financial 
burden.  The  enterprise,  however,  even  though 
poorly  paying,  continues.  There  is,  therefore,  a 
clear  public  interest  that  railroad  companies  should 
be  strong  financially.  In  order  that  they  may  be 
strong,  they  must  put  aside  from  income  the  cost  of 
actual  replacements  of  property.  They  must  also 
make  ample  provision  for  depreciation  and  for  obso- 
lescence of  property.  They  must  even  provide  for 
the  contingency  that  portions  of  the  property  may 
cease  to  earn  an  investment  return.    Thus,  the  cost 


RAILROAD  CAPITALIZATION  269 

of  a  branch  built  to  develop  coal  lands,  estimated 
to  be  worked  out  in  twenty-five  years,  is  properly  a 
charge  against  earnings  in  this  period.  The  line  may 
continue  to  be  operated  even  after  the  coal  depletion 
has  occurred,  though  it  has  ceased  to  earn  interest 
on  its  cost  or  perhaps  may  not  even  earn  direct 
operating  expense. 

Gross  Capitalization  and  Net  Capitalization.  The 
principal  stumbling  block  and  the  chief  source  of 
statistical  errors  in  the  measurement  of  railroad 
capitalization  is  the  difficulty  of  clearly  separating 
the  portion  of  outstanding  capital  securities  repre- 
senting investment  in  a  company's  own  railroad 
property  from  the  portion  covering  the  cost  of  in- 
vestments in  other  companies  or  other  enterprises. 
Railroad  capitalization  statistics  distinguish  ^^net 
capitalization"  from  '* gross  capitalization,"  It  is 
manifestly  erroneous  to  measure  the  total  capitaliza- 
tion of  a  modern  railroad  system  on  a  per  mile  basis, 
when  a  large  part  of  this  capitalization  arises  from 
the  acquisition  of  subsidiary  railroads  and  of  other 
enterprises  not  a  part  of  its  own  mileage. 

Because  of  both  the  complex  business  activities 
of  American  railroad  companies  and  the  incomplete- 
ness of  accounting  data,  the  separation  of  the  "out- 
side" investments  represented  in  railroad  capitaliza- 
tion is  an  extremely  perplexing  and  difficult  matter. 
In  the  first  place,  duplication  must  be  avoided  by 
deduction  of  inter-company  holdings,  i,  e.^  the  inter- 
ownership  of  securities  of  railroads  comprising  a 
system.      When   holdings   have   been   acquired   by 


270      AMERICAN  RAILROAD  ECONOMICS 

giving  in  exchange  the  purchasing  company's  own 
securities,  net  capitalization  can  be  measured  with 
some  degree  of  accuracy  by  deducting  the  par  value 
of  the  exchanged  securities  from  the  aggregate  capi- 
tahzation.  Thus,  the  Atlantic  Coast  Line  in  1902 
acquired  51  per  cent,  of  the  Louisville  &  Nashville 
stock,  issuing  therefor  $35,000,000  collateral  trust 
bonds.  The  stock  thus  obtained,  according  to  proper 
accounting  methods,  is  given  a  book  value  equal 
to  the  par  value  of  these  bonds.  Therefore,  in  de- 
termining the  net  capitalization  of  the  Atlantic  Coast 
Line,  $35,000,000  in  bonds  is  one  of  the  items  de- 
ducted from  the  company's  aggregate  of  capital 
securities  outstanding.  Similarly,  the  $215,227,000 
Chicago,  Burlington  &  Quincy  Collateral  Trust 
4  per  cent.  Bonds,  issued  in  1901  jointly  by  the 
Great  Northern  and  the  Northern  Pacific  railroads, 
forms  no  part  of  the  net  capitalization  of  either  of  these 
systems,  though  each,  in  its  respective  General 
Balance  Sheet,  places  one-half  of  the  entire  issue 
among  outstanding  capital  securities. 

The  deduction  from  ''gross  capitalization*'  of 
amounts  representing  ownership  or  equities  in  sub- 
sidiary companies  and  other  enterprises  is  frequently 
not  sufficient  in  order  to  determine  the  ''net  capitali- 
zation,** On  page  252  it  was  pointed  out  that  under 
the  Interstate  Commerce  Commission's  ruling,  securi- 
ties issued  or  assumed  and  pledged  as  collateral  for 
outstanding  securities,  are  to  be  included  at  par 
value  both  among  assets  and  liabilities.  A  company, 
let  us  say,  issues  $10,000,000  of  bonds.    Instead  of 


RAILROAD  CAPITALIZATION  271 

offering  them  for  sale,  it  deposits  them  with  a  trustee 
as  collateral  for  a  loan  of  $5,000,000  in  the  form  of 
three-year  notes.  In  this  way  $15,000,000  is  added 
to  the  company's  gross  capitalization,  because  both 
the  $10,000,000  bonds  and  the  $5,000,000  three-year 
notes  are  placed  among  the  outstanding  capital 
securities.  The  actual  addition  to  the  company's 
resources,  however,  is  but  $5,000,000  represented 
by  the  cash  received  from  three-year  notes.  Ac- 
cordingly, the  net  capitalization  has  increased  but 
$5,000,000.  The  $10,000,000  in  par  value  of  pledged, 
but  unsold,  securities  represents  merely  a  contingent 
liability.  Only  in  the  event  of  their  sale  either  to 
satisfy  the  claims  of  the  note  holders  or  to  realize 
additional  capital  funds  do  these  securities  actually 
become  a  part  of  net  capitalization. 

A  further  adjustment,  in  many  cases,  may  be  re- 
quired to  correctly  ascertain  net  capitalization.  The 
Interstate  Commerce  Commission's  accounting  regu- 
lations place  unsold  and  unpledged  company  securi- 
ties among  the  working  assets  in  the  General  Balance 
Sheet  and  at  the  same  time  among  the  liabilities 
under  Capital  Stock  or  Funded  Debt  It  had  formerly 
been  the  practice  of  many  railroads  to  exclude  their 
own  unsold  and  unpledged  securities  from  among 
assets,  thereby  excluding  them  from  the  capital  lia- 
bilities. This  is  undoubtedly  the  proper  method. 
These  unsold  securities  are  neither  a  resource  nor 
an  obligation.  They  are  nothing  more  than  paper. 
To  include  them  as  a  part  of  railroad  capitalization, 
is  obviously  an  unwarranted  inflation. 


9m      AMERICAN  RAILROAD  ECONOMICS 

l^et  capitalization  is  commonly  determined  by 
deducting  the  items  under  '^ Other  Investments^^  and 
also  the  par  value  of  the  companies  own  unsold 
securities  from  the  capital  liabilities  in  the  General 
Balance  Sheet.  Applied  to  the  Erie  Railroad  (June  30, 
1911),  the  process  is  as  follows: 

Capital  Stock  Outstanding $176,271,300 

Bonded  and  Secured  Debt 237,766,159 

Gross  Capitalization $414,037,459 

Less:  Pledged  Bonds  included  in  above 14,160,000 

$399,877,459 
(Deduct) 

Securities  of  other  railroads,  pledged $66,382,850 

"      "  "  unpledged 1,045,211 

Other  Investments 35,730.740 

Total  Investments  in  Other  Properties $103,158,801 

Net  Capitalization $296,718,658 

Since  the  investments  of  railroads  other  than  in 
their  own  corporate  lines  have  not  always  been  ac- 
quired directly  or  wholly  from  the  proceeds  of  the 
sale  or  the  exchange  of  securities,  this  method  is 
obviously  not  applicable  in  every  case.  As  was 
pointed  out  by  the  auditor  of  the  Atchison  system 
in  a  rate  investigation;  "Subsidiary  companies  that 
form  a  part  of  the  regular  company  come  to  us  and 
there  is  no  way  of  telling  how  much  of  these  com- 
panies is  represented  in  our  investment."^     Many 

1  Evidence  taken  in  the  Proposed  Advances  of  Freight  Rates,  Vol.  X, 
p.  5.419.,  note. 


RAILROAD  CAPITALIZATION  273 

of  the  large  railroad  systems  have  acquired  outside 
enterprises  with  accumulated  surplus  funds.  The 
Union  Pacific  furnishes  a  notable  example.  In  a 
case  of  this  kind,  if  the  Surplus  accounts  of  the  hold- 
ing company  are  added  to  the  '* gross  capitalization" 
(assuming  that  these  items  represent  their  equivalent 
in  money  value)  and  from  the  sum  is  deducted  the 
aggregate  book  value  of  ^^  Other  Investments,^^  the 
resulting  balance  shows  an  approximately  correct 
amount  of  capital  investment  in  the  railroad  property.  \ 
It  does  not  show,  however,  true  net  capitalization  as  \ 
measured  by  outstanding  securities.  Thus,  it  is  evi- 
dent that,  v)ith  the  exception  of  instances  where  the 
aggregate  holdings  in  other  corporations  have  been 
directly  acquired  by  additional  issues  of  securities, 
net  capitalization  under  existing  circumstances  can- 
not be  accurately  measured  from  the  General  Balance 
Sheet. 

Capitalization  and  Leased  Mileage.  A  further  dif- 
ficulty presents  itself  in  the  correct  measurement  of 
railroad  capitalization.  Erroneous  computations  of 
relative  capitalization  are  frequently  made  because 
of  neglect  to  consider  leased  and  rented  mileage. 
Theoretically,  a  rental  charge  is  as  much  a  payment 
for  the  use  of  capital  as  interest  and  dividends,  and 
a  railroad  company  at  times  has  the  choice  of  pur- 
chasing a  company  by  selling  securities,  or  operating 
it  under  a  lease  or  guarantee.  But  the  terms  under 
which  one  railroad  company  operates  the  property 
or  uses  the  facilities  of  another  frequently  require 
payments  which  are  partly  operating  expenses  and 


274      AMERICAN  RAILROAD  ECONOMICS 

partly  rentals.  The  Joint  Facilities  Accounts  insti- 
tuted by  the  Interstate  Commerce  Commission 
were  for  the  purpose  of  requiring  the  railroads  to 
allocate  payments  and  receipts  arising  out  of  the 
use  of  leased  and  joint  faciHties  accordingly  as  such 
payments  or  receipts  represent  charges  or  credits  to 
operating  expenses  and  charges  or  credits  for  the 
use  of  capital.  This  provision  with  reference  to 
many  railroad  leases  is  practically  impossible  of 
execution.  Accordingly,  a  computation  of  capitaliza- 
tion so  as  to  include  the  rented  and  leased  property, 
cannot  always  be  made  by  merely  adding  the  out- 
standing capitahzation  of  the  leased  line. 

Another  method  of  computing  capitalization  so  ^ 
as  to  include  leased  property  is  by  capitalizing  the 
rentals  at  a  fixed  rate.  This  assumes  that  the  rentals 
are  based  on  the  current  interest  rate.  Let  us  say 
that  the  rate  is  5  per  cent.  Then,  in  order  to  capi- 
talize the  leased  property,  total  rentals  are  divided 
by  this  current  rate  (5  per  cent.),  and  the  resulting 
quotient  is  multiplied  by  100.  Thus,  a  company 
paying  an  annual  rental  of  $500,000  for  leased  lines 
should  have  $10,000,000  added  to  the  capitalization 
represented  by  its  own  outstanding  securities.  This 
is,  at  best,  an  artificial  adjustment.  Lines  which 
are  built  by  railroad  companies  ostensibly  as  sepa- 
rate undertakings,  but  primarily  for  the  purpose  of 
operation  through  leasehold,  are  in  many  cases  ar- 
bitrarily capitalized,  whereas,  leased  lines  which 
were  previously  independent  competitors  or  which 
are  operated  as  "feeders"  may  bring  a  rental  either 


RAILROAD  CAPITALIZATION 


275 


greatly  above  or  below  that  warranted  by  earnings 
or  by  the  current  interest  rate. 

Errors  in  Capitalization  Statistics.  An  illustration 
of  the  perplexities  in  measuring  capitalization  was 
furnished  during  the  Railroad  Rate  Investigation 
of  1910.  In  the  course  of  the  proceedings  an  at- 
tempt was  made  to  compare  the  capitalization  of 
the  New  York  Central  and  the  Pennsylvania  Rail- 
roads. The  tables  compiled  by  the  Interstate  Com- 
merce Commission  made  it  appear  that  the  New 
York  Central  was  capitalized  at  $609,974  and  the 
Pennsylvania  at  $332,492  per  road-mile  owned.  The 
capitalization  of  neither,  intelligently  computed,  is 
anything  like  the  amounts  assigned,  not  even  the 
gross  capitalization  which  includes  the  value  of  stocks 
and  bonds  owned  by  the  respective  companies. 
Both  the  New  York  Central  and  the  Pennsylvania 
operate  a  considerable  mileage  of  leased  lines.  The 
proportion  of  owned  to  the  total  operated  mileage 
in  these  two  systems  in  1910  was  as  follows: 


Miles  of  Road  Owned.  . 
Miles  of  Road  Operated. 


New  York  Central 


805 
3.782 


Pennsylvania 


2,123 
3.947 


The  owned  mileage  is  practically  all  main  line  and 
terminals,  on  which  the  capitalization  is  necessarily 
high.  Fin- ther more,  each  parent  company  has  issued 
many  millions  of  its  own  securities  to  furnish  im- 
provements, equipment  and  working  cash  for  its 
entire  system,  owned  and  leased  lines  alike.     The 


^76       AMERICAN  RAILROAD  ECONOMICS 

capitalization  per  mile  on  which  the  Commission 
evidently  relied  was  obtained  by  dividing  the  entire 
capitalization  of  each  parent  company  by  the  miles 
of  road  owned,  regardless  of  the  fact  that  in  each 
case  parent  company's  capital  obligations  had  been 
issued  to  supply  the  leased  as  well  as  the  owned  mile- 
age with  improvements  and  equipment;  regardless 
also  of  the  fact  that  each  company's  capitalization 
included  obligations  issued  to  acquire  securities  on  an 
enormous  mileage  of  connecting  and  competing  lines. 

Probably  no  better  instance  of  errors  in  the  use 
of  per  mile  capitalization  statistics  can  be  pointed 
out  than  that  contained  in  the  Opinion  of  the  Inter- 
terstate  Commerce  Commission  in  the  Western  Rate 
Advance  Case,  reported  February  22,  1911.  In  the 
text  of  this  decision  the  capitalization  per  mile  of 
road  of  the  Atchison  system  is  stated  as  $84,000. 
This  amount  was  obtained  by  dividing  the  total 
capitahzation  of  the  Atchison  "System"  by  the 
mileage  of  the  Atchison,  Topeka  &  Santa  F^  "Rail- 
road" proper.  It  is,  therefore,  entirely  misleading. 
The  system  mileage  of  the  Atchison,  on  June  30, 
1910,  was  10,406  miles  against  6,837  miles  for  the 
company.  Based  on  system  mileage,  Atchison's  capi- 
talization is  nearer  $56,000  per  mile  than  $84,000.  ^ 

Relative  Interest  Burden.  In  a  correct  estimate 
of  capitalization  it  is  of  fundamental  importance  to 

*  Commissioner  Lane,  who  wrote  the  opinion,  tactfully  acknowledged 
the  error  in  a  note  added  to  a  subsequent  printing  of  the  text.  See 
"Evidence  in  the  Proposed  Advances  in  Freight  Rates,"  Vol.  X,  p.  5319» 
note. 


RAILROAD  CAPITALIZATION  277 

clearly  indicate  the  interest  or  dividend  rate  attached 
to  railway  security  issues.  If  all  railroad  companies 
had  the  same  proportion  of  each  class  and  kind  of 
securities  outstanding,  with  correspondingly  uni- 
form interest  and  dividend  rates,  the  measurement 
of  relative  capitalization  on  the  basis  of  the  par  value 
of  outstanding  securities  would  be  a  simple  matter. 
The  absolute  diversity  in  this  respect,  however, 
renders  any  study  or  comparison  of  railroad  capitali- 
zation based  on  general  compilations  utterly  nuga- 
^ry  and  of  mere  academic  interest.  It  requires 
very  little  analysis  to  demonstrate  that  a  railroad 
having  $60,000,000  of  irredeemable  preferred  stock 
outstanding  on  which  it  pays  the  full  dividend  of 
5  per  cent,  is  no  better  off  in  respect  to  this  item  of 
capitalization  than  a  company  which  has  $75,000,000 
of  preferred  stock  on  which  it  is  required  to  pay  only 
4  per  cent.  Moreover,  a  railroad  company  which 
issues  5  per  cent.  30-year  bonds  at  par  for  $50,000,000 
cash  instead  of  issuing  for  the  same  cash  sum 
$55,000,000  4  per  cent,  bonds  of  the  same  maturity 
may  be  justly  accused  of  poor  financial  management. 
In  the  case  of  the  5  per  cent,  bonds  the  annual  in- 
terest is  $2,500,000.  The  charge  on  the  4  per  cent, 
issue,  including  discount  amortization,  is  less  than 
$2,367,000. 

The  sale  of  railroad  bonds  or  other  obligations  at 
less  than  the  face  value  does  not  always  indicate 
poor  credit.  Successful  railroad  financiers  by  closely 
studying  investment  conditions  try  to  ascertain  by 
what  method  capital  may  be  acquired  at  the  lowest 


278      AMERICAN  RAILROAD  ECONOMICS 

net  cost.  If  this  can  be  done  by  issuing  at  a  discount 
bonds  bearing  a  low  interest  rate  it  is  good  financial 
policy  to  offer  these  for  sale  instead  of  bonds  bearing 
a  higher  rate.  Investors  are  frequently  satisfied 
with  a  smaller  net  return  from  a  security  to  which  a 
progressive  enhancement  of  value  is  attached  as 
the  date  of  maturity  approaches.  The  richest  rail- 
road companies,  therefore,  do  not  hesitate  to  sell 
33^  per  cent,  and  4  per  cent,  bonds  at  a  discount, 
though  by  issuing  4J/^  per  cent,  and  5  per  cent, 
obligations  they  might  obtain  a  premium.  It  is 
undoubtedly  for  the  best  interests  of  the  corporation 
to  sell  securities  at  a  rate  which  furnishes  capital 
at  the  lowest  cost.  Of  this  important  factor  in  sound 
financial  policy,  the  capitalization  statistics  com- 
monly used  give  no  clue  whatever.  It  is  the  relative 
burden  of  the  annual  charge  for  the  use  of  capital  which 
is  a  better  index  to  comparative  capitalization  than  the 
nominal  amount  of  outstanding  securities. 

The  Kansas  City  Southern,  for  example,  ha^  a 
capitalization  per  mile  of  line  owned  of  about  $119,000 
which  is  higher  than  that  of  the  St.  Louis  &  South- 
western ($70,406)  and  the  Missouri  Kansas  &  Texas 
($65,000),  or  any  other  railroad  system  in  the  same 
territory.  However,  of  the  $47,488,000  of  Kansas 
City  Southern  funded  debt,  $30,000,000  consists  of 
3  per  cent,  first  mortgage  bonds.  This  large  propor- 
tion of  low  interest-bearing  debt  combined  with  a 
large  ratio  of  capital  stock  (51  per  cent.)  to  total 
capitalization  offsets  considerably  the  disadvantage 
pf  high  "per  mile^'  capitalization.    A  comparison  of 


RAILROAD  CAPITALIZATION  ^79 

the  fixed  charges  of  Mississippi  Valley  railroad  sys- 
tems reveals  that  the  burden  of  the  Kansas  City 
Southern  in  the  fiscal  year  1912  was  but  $2,159  per 
mile  operated,  against  $2,761  borne  by  the  St.  Louis 
&  Southwestern  and  $1,822  by  the  Missouri,  Kansas 
&  Texas.  There  is  thus  no  abnormal  capitalization 
burden  on  the  Kansas  City  Southern.  This  is  further 
indicated  from  the  fact  that  its  net  income  for  several 
years  has  been  suflScient  to  meet  all  interest  charges 
and  to  permit,  in  addition,  a  maximum  dividend 
distribution  of  4  per  cent,  on  $21,000,000  preferred 
stock.  There  has  been,  besides,  a  surplus  available 
for  general  improvements  and  betterments. 

Style  of  Capitalization.  From  an  investment 
standpoint,  the  relative  proportions  of  the  various 
classes  of  securities  is  of  far  greater  import  than  ag- 
gregate amount  of  capitalization.  When  a  railroad 
system  is  earning  a  good  return  on  all  classes  of  its 
outstanding  securities,  it  is  largely  a  question  of 
financial  policy  whether  bonds  or  whether  capital 
stock  shall  be  sold  to  acquire  additional  capital. 
Companies  that  are  unable  to  distribute  dividends  to 
shareholders,  however,  cannot  readily  issue  new 
capital  stock  for  the  reason  that  people  will  not 
buy  it,  except  at  much  below  the  face  value.  Accord- 
ingly, the  only  recourse  of  these  companies  in  pro- 
viding new  capital  through  issue  of  securities  is  to 
sell  obligations  bearing  a  fixed  interest  charge.  This 
enlarges  the  ratio  of  funded  debt  to  the  total  capital- 
ization. It  also  means  an  immutable  burden  on 
current  earnings. 


280      AMERICAN  RAILROAD  ECONOMICS 

The  consequence  of  inability  to  sell  additional 
capital  stock  is  clearly  shown  in  the  capitalization 
changes  of  the  Erie  Railroad  as  compared  with  those 
of  the  New  York  Central  during  the  period  1901  to 
1910,  inclusive:  ^ 


Erie 

% 

New  York  Central 

% 

1901 

1910 

1901 

1910 

i**t 

Capital 
Stock 

Funded 
Debt 

$176,271,300 
169,862,815 

$176,271,300 
225,997,748 

0.0 
33.2 
16.2 

$116,000,000 
193,772,941 

$222,729,300 
268,592,427 

92.0 
38.5 

Total 

$346,134,115 

$402,269,048 

$308,772,941 

$491,321,727 

59.1 

It  will  be  noticed  that  during  the  last  decade  the 
outstanding  stock  of  the  Erie  Railroad  has  remained 
stationary.  The  capital  stock  of  the  New  York 
Central  during  the  ten  year  period,  however,  almost 
doubled.  Hence,  the  total  increase  in  Erie's  capi- 
talization was  in  fixed  interest-bearing  obligations, 
whereas,  less  than  41  per  cent,  of  New  York  Central's 
capitalization  increase  is  thus  represented.  Because 
Erie's  shares  sell  much  below  par,  the  company  in 
order  to  obtain  new  capital  is  forced  to  increase  its 
funded  debt.  This  method  of  financing  tends  to 
burden  a  company  with  fixed  interest  charges. 

There  is  another  side  to  the  shield,  however.    New 
financing,  through  the  sale  of  capital  stock  on  which 

^  Interstate  Commerce  Conmiission  computations. 


RAILROAD  CAPITALIZATION  281 

a  relatively  high  dividend  rate  is  paid,  entails  a 
heavier  distribution  from  earnings  than  the  same 
amount  of  interest-bearing  obligations.  In  other 
words,  the  new  capital  is  obtained  at  a  higher  cost 
than  through  sale  of  bonds.  This  has  been  the  ex- 
perience of  the  Chicago,  Milwaukee,  &  St.  Paul  in 
the  financing  of  its  Pacific  Coast  extension.  The 
New  York  Central,  the  Pennsylvania  and  the  Il- 
linois Central  also  have  caused  material  disadvantage 
to  shareholders  that  may  come  from  acquiring  new 
capital  mainly  through  the  sale  of  dividend  paying 
capital  stock.  The  financial  disadvantage  remains 
only  as  long  as  the  prevailing  dividend  rate  exceeds 
the  net  rate  on  new  funded  debt. 

Trend  of  Railroad  Capitalization.  The  record  of 
railroad  financing  in  the  years  1900  to  1913  seems  to 
indicate  that  bonded  indebtedness  is  growing  at  a 
much  faster  rate  than  capital  stock.  The  continua- 
tion of  this  trend,  however,  is  not  certain.  The 
history  of  American  railroad  finance  shows  that  first 
one  and  then  the  other  of  the  two  groups  of  securities 
excels  in  popularity.  This  is  because  of  varying 
money  market  and  investment  conditions. 

Increase  of  bonds  rather  than  stock  has  been 
assisted  at  different  times  through  the  issue  of 
convertible  bonds.  Thus,  the  Atchison  has  issued 
up  to  July  1,  1912,  a  total  of  $147,711,000  conver- 
tible bonds,  of  which  $74,328,000  had  been  con- 
verted at  the  option  of  holders  into  common  stock. 
The  Norfolk  &  Western's  financing  by  means  of 
convertible    bonds    is     another    good    illustration 


282      AMERICAN  RAILROAD  ECONOMICS 

of  successful  financing  of  this  kind.  At  the  end  of 
the  1912  fiscal  year  $19,653,000  of  a  total  issue  of 
$25,569,000  of  4  per  cent,  bonds  of  the  Norfolk  & 
Western,  dated  June  1,  1907,  were  converted  into 
stock,  reducing  the  fixed  charges  by  $786,120.  It 
should  be  noted  that  this  method  of  securing  money 
cheaply  and  of  reducing  future  fixed  charges  later 
is  dependent  on  ability  to  earn  a  substantial  divi- 
dend on  capital  stock.  In  other  words,  the  net 
dividend  return  on  the  stock  must  be  a  good  margin 
above  the  interest  rate  attached  to  the  bond  in  order 
that  conversion  may  take  place. 

A  great  deal  of  criticism  has  been  recently  directed 
against  railroads  selling  additional  capital  stock  to 
shareholders  at  less  than  prevailing  market  prices. 
In  fact,  this  practice  has  been  condemned  as  a  species 
of  stock  "watering."  A  little  reflection  as  to  the 
exigencies  of  railroad  finance  and  the  factors  deter- 
mining market  value  should  soon  dispel  these  objec- 
tions. In  the  first  place  it  can  be  readily  demon- 
strated that  market  prices  of  securities  do  not  always 
form  a  reliable  guide  of  value.  These  are  the  prices 
usually  of  but  limited  amounts.  It  is  well  known  to 
experienced  financiers  that  such  prices  cannot  be 
maintained  if  a  new  issue  is  placed  on  the  market. 
Secondly,  the  market  price  of  railroad  stock,  to  which 
there  is  attached  the  probability  of  a  valuable  "sub- 
scription" right  is  enhanced  by  reason  of  this  condi- 
tion. This  enhancement  in  value  begins  and  usually 
culminates  before  the  subscription  privilege  has 
been  received.    When  the  profit  of  the  subscription 


RAILROAD  CAPITALIZATION  283 

right  has  been  taken  away,  the  market  value  of  the 
shares  correspondingly  declines.  Moreover,  the  an- 
nouncement of  an  issue  of  new  stock  in  appreciable 
amounts,  when  the  old  shares  are  selling  at  a  slight 
margin  above  par,  frequently  causes  a  substantial 
decline  in  the  market  value  of  the  outstanding 
shares.  Railroad  financial  experience  clearly  demon- 
strates that  a  stock  must  sell  considerably  above  par 
value  when  shareholders  are  willing  to  subscribe 
for  new  issues  at  a  premium.  The  Pennsylvania 
Railroad  Company,  for  instance,  in  1903  offered 
$75,000,000  new  stock  to  its  shareholders  at  120 
when  the  market  price  was  above  140.  The  share- 
holders did  not  fully  subscribe  for  the  new  stock  so 
a  syndicate  of  bankers  were  employed  to  under- 
write the  new  shares.  In  the  meantime,  Pennsyl- 
vania shares  actually  fell  to  110^.  In  this  case  it  is 
plain  that  the  difference  between  the  market  price 
and  the  subscription  price  was  not  sufficient  to  give 
shareholders  a  profit.  The  new  stock  certainly 
could  not  have  been  sold  immediately  on  the  open 
market  at  120.  There  were  not  enough  buyers  will- 
ing to  pay  this  price. 

In  view  of  the  influence  of  capitalization  changes 
on  railroad  credit,  the  importance  of  studying  rail- 
road capital  requirements  cannot  be  magnified  un- 
duly. Because  of  extensions  and  improvements  due 
to  heavier  traffic,  to  increasing  competition  and  to 
public  demands  for  efficient  transportation  service, 
additional  capital  expenditures  of  American  rail- 
roads are  continuous.     Both  Mr.  E.  H.  Harriman 


284       AMERICAN  RAILROAD  ECONOMICS 

and  Mr.  J.  J.  Hill,  two  of  the  best  informed  railroad 
magnates  of  their  time,  repeatedly  called  attention 
to  the  heavy  demands  for  funds  necessary  to  en- 
able the  railroads  to  handle  properly  the  constantly 
expanding  traffic.  A  growing  enterprise  has  constant 
need  of  money.  The  greater  part  of  the  new  capital 
must  be  obtained  from  private  investors.  These, 
naturally,  place  their  funds  where  the  prospects  for 
returns  are  fair  and  reasonably  assured.  They  will 
put  their  money  into  railroads,  therefore,  only  as 
long  as  the  investment  returns  in  railroad  properties 
are  as  good  and  as  well  secured  as  in  other  enter- 
prises. This  competition  of  outside  securities  is  an 
element  in  the  cost  of  capital  to  the  railroads.  It 
must  be  successfully  met  if  transportation  systems 
are  to  continue  developing  and  expanding. 

The  estimated  future  capital  requirements  of  the 
New  York  Central  System  may  be  taken  as  illus- 
trative of  the  constant  railroad  demands  for  addi- 
tional funds  for  improvements  and  extensions.  On 
the  New  York  Central  Lines  it  is  conservatively 
estimated,  on  the  assumption  of  a  normal  growth 
of  business,  that  the  additional  capital  expendi- 
tures for  the  next  ten  years  will  aggregate  $50,000,000 
per  annum.  Many  of  the  improvements  contem- 
plated are  matters  of  public  importance.  For  in- 
stance, the  freight  terminals  in  the  streets  on  the 
West  Side  of  New  York  city  must  be  modernized 
and  the  grade  crossings  eliminated,  involving  an 
investment  of  probably  $45,000,000.  New  terminals 
p-re  needed  at  IJtica^  Rochester,  Buffalo,  Cleveland, 


RAILROAD  CAPITALIZATION  285 

Cincinnati,  Indianapolis  and  Detroit;  four  tracks  are 
required  on  the  Hudson  division  of  the  New  York 
Central  road  and  double  tracks  on  many  parts  of 
the  Big  Four,  Lake  Shore,  and  Michigan  Central 
lines;  ehmination  of  grade  crossings  in  Syracuse, 
Rochester,  Buffalo,  Cleveland,  Dunkirk  and  other 
places  must  likewise  be  provided.  These  are  all 
improvements  for  facilitating  the  transportation 
service.  The  money  used  for  the  purpose  must  be 
furnished  in  large  part  by  the  investing  public. 

New  capital  expenditures  such  as  those  contem- 
plated by  the  New  York  Central  undoubtedly  tend 
to  increase  or  to  maintain  earning  power.  The 
resulting  additional  income,  however,  may  not,  in 
some  cases,  offset  the  cost  of  acquiring  the  new  capi- 
tal. The  purpose  of  new  capital  expenditure  in  each 
instance  gives  only  a  partial  indication  of  its  profit- 
ableness. One  railroad  may  borrow  heavily  and 
enlarge  its  capitalization  without  augmenting  earn- 
ing power  proportionately.  On  the  other  hand,  a 
rival  system,  which  does  not  apply  new  capital  to 
develop  aggressively,  is  pretty  certain  to  suffer  a 
decline  in  the  net  return  on  its  investment.  The 
latter  fails  to  keep  up  with  the  improvements  taking 
place  around  it.  Its  inferior  transportation  service 
diverts  traffic  to  competitors.  This  loss  of  business, 
unless  recovered  in  time,  is  the  first  step  to  receiver- 
ship and  reorganization. 


INDEX 


Abandonment  of  Property,  182- 
183,  235. 

Accounting — Fundamental  Prin- 
ciples, 169-171. 

Accounts  (See  Interstate  Com- 
merce Commission,  Railroads, 
etc.). 

Acworth,  W.  M.— quoted,  3,  180. 

Additions  and  Betterments,  classi- 
fication, 177-180;  necessity  for, 
283-285. 

"AflSliated"  Companies,  defined, 
54. 

American  Railroads  (See  also 
Railroads),  Contrasted  with 
European,  97-98;  physical  im- 
provement of,  16;  financiering 
policy,  235. 

American  Railway  Association, 
rail  statistics,  114,  n.;  car- 
performance  statistics,  157. 

Anthracite  Systems,  64. 

Assets,  accounts,  242;  "fixed,"  242; 
"hidden,"  255-256;  "working" 
or  "current,"  258-260. 

Atchison,  Topeka  &  Santa  Fe  R. 
R.  System,  79;  reduction  of 
grades,  105;  diversification  of 
tralEc,  144;  convertible  bond 
issues,  280. 

Atlantic  Coast  lone;  issue  of  col- 


lateral trust  bonds,  37;  system 
described,  66-67;  locomotive 
maintenance  costs,  203;  car 
maintenance  costs,  204;  dividend 
policy,  232. 


B 


Balance  Sheet  (General):  general 
survey  of,  241;  classification  of 
items,  243-246. 

Ballast,  115-116;  factors  influenc- 
ing kind  used,  116;  depth  of, 
116-117. 

Baltimore  &  Ohio  Railroad:  orig- 
inal purpose  of  construction,  44; 
joint  control  of  Reading  Com- 
pany, 53;  location  of  lines,  63; 
comparative  operating  ratios, 
216;  comparative  cost  of  road 
and  equipment,  251. 

Betterments  (See  Additions  & 
Betterments). 

Bonds:  classification,  32;  mort- 
gage, 32-36;  collateral  trust,  36- 
37;  convertible,  38-40;  plain, 
40;  income,  40;  discounts  and 
premiums  on,  in  the  accounts, 
181;  increase  in  amount  of,  281. 

Bonuses  to  Stockholders,  30,  254- 
255,  264,  282. 

Bridges:  injBiuence  of,  on  economic 


287 


288 


INDEX 


operations,  118;  growth  in  capac- 
ity. 119. 


California  Citrus  Fruit  Rate 
Cases,  14. 

Canadian  Pacific  System:  in  the 
United  States,  77-79;  hidden 
assets;  capital,  charges  to,  de- 
fined, 171-172. 

Capital  (railroad),  265;  (See  also 
Investment,  Expenditure,  etc.), 
265;  Capital  stock,  nature  of, 
17-21;  voting  privileges,  19; 
classes,  22;  preferred,  22-28; 
common,  28. 

Capitalization  Railroad  (Chapter 
XII),  defined.  17,  265;  per- 
manent nature  of,  266;  gross 
and  net  capitalization,  269; 
measurement  of,  from  the  gen- 
eral balance  sheet,  270-273; 
effect  of  leased  mileage,  273- 
£75;  errors  in  statistics  of,  275- 
276;  style  of  capitalization,  279; 
effect  of  varying  rates  of  inter- 
est, etc.,  276-279;  trend  of,  281- 
283;  importance  of  studying 
changes  in,  282. 

Cars:  growth  in  size  and  capacity, 
129-131;  tendency  toward  steel 
construction,  131-132;  influence 
of  "dead  weight"  on  size,  132- 
133;  standardization  of  parts, 
133;  **car  shortages"  and  car 
performance,  133-134. 

Car  Load,  158. 

Car  movement,  empty,  143. 

Car-MUe,  155,  160, 


Car  Performance  (See  Car-Mile). 

Car  rentals,  134. 

Car  Shortages,  157. 

Charge,  Margin  of  (See  Rates). 

Chesapeake  &  Ohio  R.  R. :  location 
of  lines,  53;  grades,  104. 

Chicago  &  Alton  R.  R.:  location  of 
lines,  72;  majority  stock  ac- 
quired, 267. 

Chicago  &  North  Western  R.  R.: 
location  of  lines,  76;  participat- 
ing preferred  stock,  25;  profit  & 
loss  statement  analysed,  238- 
240. 

Chicago,  Burlington  &  Quincy  R. 
R.:  control  by  Great  Northern 
and  Northern  Pacific  railroads, 
49,  73;  location  of  lines,  77; 
train-mile  and  ton-mile  statis- 
tics, 153. 

Chicago,  Milwaukee  &  St.  Paul 
R.  R.:  participating  preferred 
stock,  25;  location  of  lines;  Pa- 
cific Coast  extension;  dividend 
deducted  from  Profit  and  Loss. 

Chicago,  Rock  Island  &  Pacific  R. 
R.  (See  Rock  Island  Co.). 

Cincinnati,  Hamilton  &  Dayton 
R.  R.,  63. 

Clark,  Prof.  John  M.,  quoted,  4. 

Cole,  Prof.  Wm.  M.,  quoted. 
170. 

Collateral  Trust  Bonds,  36-37. 

Colorado  &  Southern  R.  R.,  77. 

Competition,  Sectional  and  Rate 
Adjustments,  10-12. 

Construction  (Railroad):  econom- 
ics of,  (Chapter  III),  cost  es- 
timates, 93-95;  fundamental 
economic    principle,    96-97;    il- 


INDEX 


lustrations  of  high  cost,  99- 
106.  / 

Control,  Joint,  253.  ^ 

Convertible  Bonds,  38-39. 

Costs  (See  Expenses). 

"Cost-of-Road,"  243. 

Credit.  Railroad,  51,  233  (See  also 
Surplus). 

Current  Assets,  258-260. 

Current  Indebtedness,  30. 

Curves,  Effect  on  economic  opera- 
tion, 106. 


Debenture  Bonds,  40-41. 

Deed  of  Trust,  33. 

Deferred  Credit  Items,  245. 

Deferred  Debit  Items,  242. 

Delaware  &  Eastern  R,  R.,  Pro- 
spectus of  (extract),  89. 

Delaware  &  Hudson  Co.,  64. 

Delaware,  Lackawanna  &  West- 
ern R,  R.,  "cut  off,"  156;  loca- 
tion of  lines,  64. 

Demurrage  Regulations,  156. 

Denver  &  Rio  Grande  R.  R. :  loca- 
tion of  lines,  80-81;  narrow 
gauge  track,  107,  crediting  ac- 
crued income,  224. 

Depreciation  in  R.  R.  Accounts, 
176-177,  243. 

"Diminishing  Returns"  (See  Re- 
turns). 

Direction  of  Traffic,  104. 

Distance:  as  an  element  in  eco- 
nomic operation,  103. 

Dividends,  30. 

Dividends,  Stock  (See  Bonuses). 

Docks,  123. 


E 


Earnings,  Gross  (See  Receipts  Op- 
erating). 

Earnings,  Net  (See  Revenue^  Net 
Operating). 

Earnings,  surplus  (See  also  Net 
Corporate  Income),  Analysis  of, 
in  New  York  Central  system, 
222-223. 

Eastern  Trunk  Lines,  59-69. 

Economy  in  Operations:  statistics 
for  measuring  (See  Efficiency); 
•  economy  in  use  of  fuel,  211. 

Economics  of  Railroad  Construc- 
tion, Chapter  III,  85-101. 

Economic  Conditions:  changes  in 
and  rates,  15-16. 

Efficiency  in  Operations,  statistics 
for  measuring,  149-160. 

Efficiency  in  Equipment  Main- 
tenance, 201  et  seq. 

Efficiency  Index:  transportation 
costs  as,  209. 

Equipment,  Railroad  Rolling  (See 
also  Locomotives  and  Cars), 
Chapter  VI:  adequacy  of,  124; 
proper  amount  for  economical 
operation,  128;  maintenance 
costs,  units  for  measuring,  201- 
208. 

Equipment  Trust  Certificate,  43. 

Erie  Railroad:  conservative  divi- 
dend policy,  24;  voting  privilege 
of  bonds,  32;  purpose  of  con- 
struction, 44;  location  of  lines, 
62;  reduction  of  grades,  106; 
improvement  in  track  facilities, 
110;  Bergen  Hill  tunnel,  120; 
improvement  in  operating  effi- 


^90 


INDEX 


ciency,  153;  locomotive  fuel 
costs,  211;  growth  in  bonded  in- 
debtedness, 280. 

Expenses,  Operating:  importance 
of,  in  gauging  efficiency  and 
financial  progress,  195;  nature 
of,  195-196;  classification,  196- 
197. 

Expenses,  Conducting  Transporta- 
tion, 209-213. 

Expenses,  Maintenance  (See  Main- 
tenance). 

Expenditures,  Capital  (See  also 
Additions  and  Betterments, 
Capital,  Construction  Costs, 
etc.),  283-285. 


"Feeders,"  60-228. 

Financial  Data,  classification  of, 
169-172. 

Fixed  Assets  (See  Property  Ac- 
counts). 

Fixed  Charges,  225-226. 

Freight  (See  also  Rates,  Traffic, 
etc.),  predominance  of  freight 
business,  135-136;  carload  and 
less  than  carload  freight,  140; 
diversified  tonnage,  141. 

Fuel  Costs,  Locomotive,  211-213. 

Funded  Indebtedness  (See  also 
Bonds,  Notes,  etc.),  31-32. 


Gould   Group   of    Railroads,   49- 

50. 
Grades,    Influence    on    Economic 


Operation,  103-106;  their  con- 
stant reduction,  105. 
Great  Northern  Railway  Com- 
pany: its  preferred  stock,  29; 
joint  control  of  Burlington,  73; 
location  of  lines,  75;  distribution 
of  ore  trust  certificates,  254. 


Harriman,  E.  H.,  21,  73,  283; 
Harriman  lines  (See  also  South- 
ern Pacific  R.  R.  and  Union 
Pacific  R.  R.),  50. 

Haul:  average  length  of,  146-149; 
method  of  computing,  146; 
limited  statistical  value  of,  147- 
148;  advantages  of  "long  haul," 
148. 

Hawley,  E.  H.,  Group  of  Rail- 
roads, 49-50. 

Hepburn  Act,  7. 

Hill,  James  J.,  284;  group  of  rail- 
roads, 49-50. 

Hocking  Valley  R.  R.:  preferred 
stock  redeemed,  25;  controlled 
by  Chesapeake  &  Ohio,  64. 

Holding  Companies,  53-55. 


I 


Illinois  Central  Railroad:  contest 
for  administrative  control,  21; 
location  of  lines,  68-69;  owns 
stock  of  Yazoo  &  Mississippi 
Valley  R.  R.,  229;  fraud  in  re- 
pair shops,  207-208. 

Improvements,  and  Increased 
Earning      Capacity,      179-180, 


INDEX 


291 


283-285  (See  also  Additions  and 
Betterments). 

Income  Account  (Chapter  IX), 
169;  definition,  186;  prescribed 
form  of,  186-190. 

Income,  charges  to,  170,  178. 

Income,  Operating  (See  also  Rev- 
enues), 190  et  seq.,  221. 

Income,  Net,  and  its  Distribution 
(Chapter  X),  221-234. 

Income,  Corporate,  Deductions 
from,  225-229;  net  corporate, 
229  et  seq. 

Interstate  Commerce  Commission, 
creation  of,  6;  progress  of  rate 
control,  6-8;  rate  decisions  (See 
Spokane  Case,  Shreveport  Case, 
California  Citrus  Cases,  etc.). 

Interstate  Commerce  Commission, 
System  of  Railroad  Accounts 
(Chapter  VIII),  169-186;  under- 
lying motives,  172-173;  princi- 
pal accounting  regulations,  173- 
184. 

Investments:  in  other  railroads, 
52,  222  et  seq.;  classification  of, 
in  the  General  Balance  Sheet, 
243-244,  251-253;  miscellan- 
eous, 254-258. 

Iowa  Central  Railroad  (See  Min- 
neapolis &  St.  Louis  R.  R.). 


Joint  Administrative  Control,  253. 
Joint  Facilities  Accounts,  175-176. 


Kansas    City    Southern    Railway 
Company,  location  of  lines,  71; 


traffic  agreement  with  Southern 
Pacific  and  Union  Pacific  Sys- 
tems, 83;  suit  against  Interstate 
Commerce  Conunission,  184. 


Leased  Lines,  and  System  Expan- 
sion, 55-56. 

Leased  Mileage,  and  Capitaliza- 
tion, 273-275. 

Lehigh  Valley  Railroad:  location 
of  lines,  64;  stock  bonus,  264. 

Liabilities,  classification,  244-245; 
"Working,"  258-260. 

Local  Lines:  defined,  45. 

"Long  and  Short  Haul"  Rates, 
12-14. 

Locomotives:  growth  in  size  and 
capacity,  124-125;  tractive 
power  unit,  126-127;  types  de- 
termined by  traffic,  127-128; 
"rating,"  128;  contrivances  for 
promoting  efficiency,  129;  fuel 
costs,  211-212. 

Louisville  &  Nashville  R.  R. :  con- 
trol by  Atlantic  Coast  Line,  37; 
location  of  lines,  69. 

M 

McCrea,  Samuel,  quoted,  233. 

Maintenance  Accounts,  176-177. 

Maintenance  of  Way:  measure- 
ment of,  197-201. 

Maintenance:  of  equipment,  201- 
208. 

"Melon  Cutting"  (See  also  Bon- 
uses), 28-29,  264. 

Middle  Western  Railroad  Systems 
in  the  North,  72-73. 


29^ 


INDEX 


Mileage:  directly  operated,  53; 
wisdom  of  branch  extensions,  98. 

"Mileage  Costs,"  150-157  (See 
also  Ton-Mile,  Train-Mile,  Lo- 
comotive-Mile, etc.). 

Mileage,  Leased,  and  Capitaliza- 
tion, 273-275. 

Minneapolis  &  St.  Louis  R.  R.,  50. 

Minneapolis,  St.  Paul  &  Sault  Ste. 
Marie  R.  R.:  location  of  lines, 
77. 

Minnesota  Rate  Cases,  9. 

Missouri,  Kansas  &  Texas  R.  R., 
50;  location  of  lines,  71. 

Missouri  Pacific  System,  100;  lo- 
cation of  lines,  80. 

Missouri  River  Rate  Case,  11. 

Mortgage  Bonds,  32-34. 

Mortgages,  General  and  Divi- 
sional, 35. 


N 


New  England  Systems,  59. 

New  York  Central  Lines:  expan- 
sion through  leases,  56;  location 
of  lines,  61-62;  capitalization 
per  mile  of  road,  275;  increase 
in  capitalization,  1901-1910, 
280;  surplus  earnings  of  sub- 
sidiaries, 222;  new  capital  re- 
quirements, 284-285. 

New  York,  New  Haven  &  Hart- 
ford R.  R.  System,  59;  passen- 
ger business,  135;  sale  of  stock  at 
a  premium,  262. 

Norfolk  &  Western  Railway  Com- 
pany: in  Pennsylvania  R.  R. 
group,  60;  grades,  104;  weight  of 


rails  in  track,  112;  convertible 
bond  issue,  282. 

Northern  Pacific  R.  R.:  joint  con- 
trol of  "Burlington,"  49;  loca- 
tion of  lines,  75;  dividend  from 
Northwestern  Improvement 
Company,  254. 

Northwestern  Trunk  Lines,  73-78. 

Notes,  Railroad,  32,  42-43. 


O 


Obligations,  Capital  (See  Funded 

Indebtedness). 
Obligations,  Contingent,  228. 
Obsolescence  (See  Depreciation). 
Operating  Accounts,  190-192. 
Operating  Companies,  52. 
Operating     Economy    and     EflS- 

ciency,  statistics  for  measuring, 

149-168. 
Operating  Income,  221-225. 
Operating  Ratio,  213-217. 
Operating  Receipts  (See  Receipts). 
Operating  Revenue,  Net,  217-218. 
Organization:  complexity  of  R.  R., 

and  accounting  methods,  185. 
"Outside    Operations,"    174-175, 

191-192. 


"Parent"  Company,  46. 

Passenger  Business,  135-136. 

Pennsylvania  R.  R.:  number  of 
stockholders,  21;  ownership  of 
Pennsylvania  Company,  55;  sys- 
tem lines,   60-61;  large  leased 


INDEX 


293 


mileage,  56,  275;  stock  issue  in 
1903,  283. 

Pere  Marquette  R.  R.:  its  cumu- 
lative preferred  stock,  24;  orig- 
inally a  lumber  road,  266. 

Preferred  Stock,  22-28. 

Profit  and  Loss  Account,  169,  234- 
240. 

Property,  Abandonment  of,  182- 
186. 

Property  Accounts,  246-258. 

Property,  Railroad:  valuation  of, 
248. 

Proprietary  Companies:  defined, 
54. 

Pro-Rating,  47. 

Prospectus,  87-88. 

Proxy  Voting,  21. 


R 


RaUs,  112-115. 

Railroad  Construction  (Chapter 
IV):  investment  basis  of,  85; 
estimates  of  cost,  93-96;  funda- 
mental economic  principle  of, 
96-99;  illustrations  of  high  cost, 
99-100. 

Railroad  Securities  (Chapter  IV), 
17-43  (See  also  Bonds,  Notes, 
Stocks). 

Railroad  Systems  of  the  United 
States  (Chapter  III):  develop- 
ment of,  44-46;  mileage  of  lead- 
ing systems,  48-49;  grouped  ac- 
cording to  administrative  con- 
trol, 49-50;  methods  of  unifica- 
tion, 51-52;  geographical  groups, 
56-58;  New  England  Systems, 
59;  Eastern  Trunk  Line  Sys- 


tems, 59-64;  Anthracite  Sys- 
tems, 64;  Southern  Systems,  64- 
67;  Mississippi  Valley  Systems, 
67-71;  Middle  Western  Sys- 
tems in  the  North,  72-73; 
Northwestern  Systems,  73-78; 
Southwestern  Systems,  78-82. 

Railway,  Location,  103. 

Rates,  Railroad  (Chapter  I):  eco- 
nomic theory  of,  1-5;  regulation, 
5-8;  interstate  and  intrastate, 
8-10;  rate  adjustments  and 
sectional  competition,  10-12; 
"Long  and  Short  Haul,"  12-15; 
effect  of  changes  in  economic 
conditions,  15-16. 

Rates  and  new  railroad  construc- 
tion, 90-91. 

Ratio,  Operating,  213-217. 

Receipts  per  Ton-Mile,  140-144. 

Receipts,  Operating:  classified, 
190;  standard  units  of,  192-195; 
effect  of,  on  net  income,  196,  n. 

Regulation:  of  rates,  5-8;  of  rail- 
road accounts,  171. 

Rents,  189. 

Returns,  Theory  of  Increasing  and 
Decreasing,  109,  195. 

Revenue  (See  also  Income,  Re- 
ceipts): net  operating,  217;  in 
relation  to  capital  investment, 
218. 

"Rights,"  30. 

Road  and  Equipment:  cost  of,  in 
the  accounts,  248-251. 

Roadbed  and  Superstructure,  106- 
123. 

Rock  Island  Company:  a  holding 
corporation,  53;  voting  privi- 
leges of  preferred  stock,  27. 


294 


INDEX 


Route:  advantages  of  a  favorable, 

82;  selection  of,  91-92. 
Rutland     Railroad:     cumulative 

preferred  stock,  24. 


Safety,  Margin  of,  229. 

Seaboard  Air  Line:  location  of 
lines,  64;  comparative  cost  of 
equipment  maintenance,  203- 
204. 

Securities,  Railroad  (Chapter  II), 
17-43;  sale  of,  at  discount  or 
premium,  181;  market  value  in- 
fluences, 236,  282. 

"Securities  Owned"  (See  Property 
Accounts). 

"Service,  cost  of,  and  value  of,"  4. 

Sherman  Anti-Trust  Law:  applica- 
tion to  railroads,  58. 

Shreveport  Rate  Case,  10. 

Southern  Railway:  voting  trust 
agreement,  20;  dividend  policy, 
24;  location  of  lines,  65-66;  com- 
parative maintenance-of-way 
cost,  200;  equipment  mainte- 
nance, 203-204. 

Southern  Railroad  Systems,  64-67. 

Southwestern  Railroad  Systems, 
78-81. 

Speed  of  trains,  160. 

Spokane  Rate  Cases,  13. 

Stations:  effect  of  location  on  traf- 
fic, 93. 

Stock:  classes  of,  22;  preferred,  22- 
28;  common,  28-32. 

Stock  Book,  22. 

Stockholders:  rights  and  privileges, 
18-19. 


Subsidiary  Companies,  46. 

Superstructure  (See  Roadbed). 

Surplus  (See  also  Profit  and  Loss 
Account) :  relation  to  credit,  233; 
"Appropriated,"  236;  interpre- 
tation of,  261-262;  in  relation  to 
stock  dividends  and  bonuses,  / 
264. 

Systems,  Railroad  in  the  U.  S. 
(Chapter  III),  44-83;  New 
England,  59;  Eastern  Trunk 
Lines,  59-64;  Southern,  64-67; 
Mississippi  Valley,  67-71;  Mid- 
dle Western  Systems  in  the 
North,  72-73;  Northwestern 
Trunk  Lines,  73-78;  Southwest- 
ern Trunk  Lines,  78-81. 


Taxes,  in  the  Income  Account,  189, 
218-219;  varying  rates  in  dif- 
ferent States,  219-220. 

Terminal  Sites:  cost  of,  94,  122- 
123. 

Terminal  Facilities,  120-121;  spe- 
cial, supplied  by  railroads,  123. 

Terminal  Expenses:  nature  of,  147. 

Through  Routing,  47. 

Ties,  Railroad,  117. 

Toledo,  St.  Louis  &  Western  R.R.: 
location  of  lines,  72;  purchase  of 
Chicago  &  Alton  R.  R.  stock, 
267. 

Ton-Mile  Averages,  138-139. 

Track  Facilities,  107,  111. 

Traffic  Interchange  Agreements, 
82-83. 

Traffic:  methods  of  estimating,  88- 
90;  and  additional  stations,  93; 


INDEX 


295 


direction  of,  104;  freight  and 
passenger,  135-136;  diversifica- 
tion of,  140-141;  density  of, 
145-146. 

Traffic  Statistics  (Chapter  VII), 
135-168;  classification  of,  137 
(See  also  Ton-Mile,  Train-Mile, 
etc.). 

Train  Frequency,  160. 

Train-Mile,  151-154. 

Train  Resistance,  161-162. 

Transportation,  Cost  of  Conduct- 
ing, 209-213. 

Trunk  Line:  definition  of,  45. 

Trust  Agreement,  Voting,  19. 

Trust,  Deed  of,  33. 

Tunnels,  120. 

"Turnover,"  214. 


Union  Pacific  R.  R.:  control  of  St. 
Joseph  &  Grand  Island  R.  R., 


27;  control  of  Southern  Pacific, 
49,  50,  n.;  75;  location  of  lines, 
74-75;  large  investment  in- 
come, 224-225;  investments 
from  accumulated  surplus,  273. 


Virginian  R.  R.,  99. 

Voting  Trust  Agreement,  19-20. 

W 

Wabash  R.  R.  Co.:  illustrates  the- 
ory of  decreasing  returns,  109- 
110;  location  of  lines,  72. 

Wages,  212-213. 

Way  and  Structures  (See  Main- 
tenance). 

Webb,  W.  L.,  quoted,  82. 

Wellington,  A.  M.,  quoted,  121, 
195  n. 

White,  J.  G.  Company:  extract 
from  a  report  of,  89. 

Working  Assets,  244. 


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Government  Regulation  of  Railway  Rates 

A  Study  of  the 

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By    prof.    HUGO    R.    MEYER 

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Cloth    486  pages    Map    i2mo    %i.5o  net 

Professor  Meyer  here  points  out  the  respective  advantages  and 
disadvantages  of  the  two  opposing  poUcies  —  the  foreign  poHcy  of 
equahty  of  charges  for  equal  services,  and  the  American  policy  of 
charging  what  the  traffic  will  bear.  Professor  Meyer's  sources  are 
authoritative,  his  details  are  expHcit,  and  his  statements  are  clear 
and  concise.  The  book  is  of  special  interest  in  view  of  the  present 
discussion  concerning  railroads  and  the  government. 

"  A  timely  and  most  important  contribution  to  a  subject  of 
national  interest.  .  .  .  Intelligent  Americans  who  wish  to  inform 
themselves  on  this  subject,  and  particularly  to  obtain  a  knowledge 
of  what  the  results  have  been  in  other  countries  of  the  regulation 
of  systems  of  transportation  by  government,  cannot  go  to  a  better 
source."  —  Editorial  in  the  Boston  Herald. 

"  The  author  has  produced  a  remarkably  clear  and  forcible  book 
upon  a  very  involved  and  difficult  subject.  ...  It  will  be  much 
easier  to  denounce  him  than  to  answer  him." — Journal  of 
Political  Economy. 

"  A  book  that  is  attracting  wide  attention  all  over  the  East,  and 
promises  to  be  read  more  thoroughly  in  the  next  few  months  by 
the  business  man  and  poUtical  students  of  the  country  than  any 
other." — Denver  Republican. 

"  Professor  Meyer  represents  the  extreme  advocates  of  letting 
the  railroads  alone.  The  book  is  interesting  from  the  vigor  and 
fearlessness  with  which  its  thesis  is  presented,  and  the  mass  of 
information  that  its  author  has  collected."  —  Boston  Transcript. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Business 
Organization  and  Combination 

An  Analysis  of  the  Evolution  and  Nature  of  Business  Or- 
ganization in  the  United  States  and  a  Tentative  So- 
lution of  the  Corporation  and  Trust  Problems 

By  lewis    H.    HANEY,    Ph.D. 

Professor  of  Economics  in  the  University  of  Texas.     Author 

of  "  A  Congressional  History  of  Railways  "  and 

"  History  of  Economic  Thought." 

Cloth    i2mo    %2.oo  net 

Dr.  Haney  in  his  treatment  of  business  organization  recog- 
nizes two  kinds :  business  that  is  productive  from  the  social 
point  of  view,  and  business  that  is  productive  only  from  the 
individual  point  of  view.  According  to  the  social  point  of 
view,  business  is  productive  when  it  adds  to  the  net  sum  of 
goods  and  services  which  men  want ;  that  is,  when  the 
amount  of  food,  clothes,  books,  automobiles,  teaching,  medi- 
cal service,  etc.,  is  increased.  But  individuals  may  grow 
rich  in  ways  which  do  not  increase  the  net  sum  of  goods  and 
services  and  still  be  actively  engaged  in  business,  or  in  pro- 
duction from  the  individual  standpoint.  A  large  part  of  ad- 
vertising is  merely  acquisitive,  not  adding  anything,  but  tak- 
ing for  one  business  man  what  another  business  man  loses. 
So  it  is  with  some  "  speculation  "  and  some  middlemen's  ac- 
tivities. But  all  this,  when  recognized  as  lawful  and  when 
the  price  is  freely  paid.  Dr.  Haney  calls  "business  ";  and  in 
the  long  run,  he  holds,  the  test  of  a  good  business  man  is 
simply  the  amount  of  income  or  private  gain  which  he  ac- 
quires legally.  In  his  treatment  Dr.  Haney  has  recognized 
"  business  "  to  include  some  activities  which  add  nothing  to 
the  sum  total  of  society's  wealth. 


THE   MACMILLAN  COMPANY 

FubliBhers  64-66  Fifth  Avenue  New  York 


ECONOMICS  OF  BUSINESS 

By 
NORRIS   A.    BRISCO,   Ph.D. 

Instructor  in  Political  Science  in  the  College  of  the  City  of  New  York 


Cloth    i2mo    %i.5o  net 


Business  principles  and  methods  are  discussed  in  this 
volume  in  clear,  untechnical  language,  and  in  such  a  man- 
ner as  to  make  the  work  one  which  may  be  read  intelli- 
gently by  the  novice  and  with  profit  by  the  business  man, 
and  which  may  be  used  to  advantage  as  a  text  in  college 
courses.  The  author's  knowledge  of  business  conditions 
and  methods  is  based  upon  his  personal  experience,  his 
work  in  the  classroom,  and  his  study  of  the  pubUcly  and 
privately  expressed  views  of  the  leading  experts  in  the 
various  lines  of  business  activity.  Among  the  topics 
treated  are  Organization,  Management,  Cost  Accounting, 
Efficiency  of  Methods,  Labor,  Buying,  Selling,  Advertising, 
Money  and  Credit,  Copyrights  and  Patents. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


The  Life  Work  of  Edward  A*  Moseley  * 
in  the  Service  of  Humanity 

By   JAMES    MORGAN 


IN  PREPARATION 


Cloth  8vo 
This  is  the  story  of  a  government  official  who  quietly 
turned  what  might  have  been  a  routine  task  into  a  noble 
service  on  behalf  of  his  fellowmen.  Edward  A.  Moseley 
was  Secretary  of  the  Interstate  Commerce  Commission 
from  its  organization  in  1887  until  his  death  in  191 1. 
During  these  years  he  was  ever  the  champion  of  laws 
which  had  for  their  purpose  the  promotion  of  safety,  jus- 
tice and  peace  on  the  railroads  of  the  United  States.  As 
a  pioneer  in  an  important  field  of  ameliorative  legislation 
his  work  and  his  papers  deserve  the  attention  of  those 
who  are  interested  in  the  development  of  the  federal 
power  as  a  regulative  agency.  The  narrative  and  the 
documents  of  his  long  and  successful  endeavor  before 
Congress  and  in  the  courts  are  significant  material  for  an 
opening  chapter  in  the  history  of  the  supervision  by  the 
nation  of  interstate  affairs. 


THE  MACMILLAN  COMPANY 

PubliBberB  64-66  Fifth  Avjanua  New  York 


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